1. Value Innovation in Electricity UtilitiesHeiko Gebauer, Hagen Worch & Bernhard TrufferDepartment Innovation Research in Utility Sectors (Cirus)Eawag: Swiss Federal Institute of Aquatic Science and TechnologyKarlstad University (Sweden)Seminar in Karlstad, October 26-27 2011

2. Changing environment for electricityutilitiesCustomer Renewable energies Smart grid & smart meters Electric cars Market liberalization Sustainability Social networksSource: Picture are free-licensed by Gettyimages 3. Empirical example RWE (national provider) German company Founded in 1898 in Essen Revenue 53.32 billion Profit 3.57 billion Owner of 5 nuclear power plants (2in dismantling, 1 stopped generation) Owner of several other coal-firingpower plants and natural gas powerplants Attends private and businesscustomers Energy mix (2009) consists of:fossil fuels 79%nuclear power 18%renewable energies 3%Key factsPower generation,sales and marketing;distributionNew business fields like intelligenthome solutions, support for electric drivencars (e-cars) (pioneer role in Germany),support around solar affairsCustomer service such asinformation; self servicesAdvanced services such as supportprograms for heat pumps and newlydeveloped natural gas heatings 4. Empirical example YelloStrom costleadershipGeneration by EnBWpower plants andpurchasing from themarket; distribution &salesCustomer service self-service;informationKey facts Founded in 1999 100% of stacks are hold byEnBW Revenue 735 million Started with 100,000 customers In 2010 1,1 million customers Purchases current from EnBWpower plants and at currentmarket Supplier of electricity andcurrent near services Low-price-policy, verysuccessful Attends private and businesscustomers Energy mix (2009) consists of: fossil fuels 29% nuclear power 47% renewable energies 24%Advanced services as solar support,online electricity meter 5. Empirical example Municipality Munich (local) municpial energy provider; 100% ofstocks are hold by city of Munich founded in 1998 revenue 3.766 million owns 3 combined heat and powerplants and 11 hydro-electric powerplants and drives 10 baths withinMunich; geothermic power plant engaged in several solar projects inAndalusia attends to private and businesscustomers the energy mix (2010): fossil fuels 76,8 % nuclear power 0% renewable energies 23,2 %Key factsGeneration;distribution of current,gas and internet;salesNew business fields: Participant inmodel project for e-cars and e-bikesCustomer service: internetbill paying, informationAdvanced services: online meter,100% renewable energies 6. Newness to the customerIncrementalinnovations Generating, distributing, and selling electricitywith few customer service as an add-ons Generating, distributing, and selling electricity Extended service offerings, includingcustomer service, basic & advanced servicesfor energy efficiency Exploration of new business opportunitiesemerging through new technologiesExternal environmentValue innovationopportunitiesPosition in value chain Liberalisation of electricity markets Strong environmental concerns surroundingrenewable energy and energy efficiency Diffusion of new technologies such as smartmetering, smart grid, ICT, and electric mobilityNewness to the electricityutilityLow HighLowHighRadical innovationsValue innovationFundamentalreconceptualisation of thebusiness model,Reshaping of existingmarkets, andDramatic value improvementsfor customers. Regulated electricity markets Little environmental concerns aroundrenewable energy and energy efficiencyOur conceptual framework combinesfollowing key constructs 7. Our conceptual framework combinesfollowing key constructsPotential absorptivecapacityKnowledge acquisitionKnowledge assimilationDegree of realized absorptivecapacityTransforming and exploiting theknowledge into differentdegrees of value innovationFundamental re-conceptualization of thebusiness modelReshaping of existing marketsDramatic value improvementsfor customersContext (moderator) variablesOrganizational formStrategy & strategic behaviorNetwork position and behaviorP2P1P2Proposition 1: By mediating the relationship potential and realized absorptive capacity,combinative capabilities determine the degree of realized absorptive capacity for valueinnovationsProposition 2: Contextual variables either strengthen or weaken the mediating effectsIndependent variable Dependent variableCombinative capabilitiesCoordination capabilitiesSystem capabilitiesSocializing capabilitiesMediator variableP1LowHigh 8. Nature and type of value innovation ischaracterized by three different components Questions existing business models, breaks away from taken-for-granted assumptions about competition, industries and their intra- and inter-organizational ways of working and deviates from the dominant industryrecipe Reshapes existing markets by changing the nature of competition,looks across conventionally defined boundaries of competition, discoversuncontested market spaces and seeks radically superior value, which willrender competition irrelevant Strives, not for marginal or incremental improvements, but for quantumleaps in value, includes innovating customers by increasingly consideringbusiness opportunities from the value-in-use and value co-creationperspective, and is therefore not restricted to new services and products, butalso addresses customer roles and skills in the value creation process.Sources: Kim and Mauborgne, 1999; Matthyssens, Vandendempt and Berghman, 2006; Christensen et al., 2002; Hamel, 1998;Markides, 1998, Vargo and Lusch, 2004 9. Value innovations require absorptive capacityAbsorptive capacity ...... firms ability to recognize the value of new information, assimilate it, and apply itto commercial ends... consists of two components: potential absorptive capacity and realizedabsorptive capacity Potential absorptive capacity - knowledge acquisition andassimilation, which refer to a firms capacity to identify and acquireexternally generated knowledge. Realized absorptive capacity encapsulates the firms capacity to transformand exploit the knowledge for commercial purposes (knowledgetransformation and exploitation).Source: Cohen and Levinthal, 1990; Zahra and George, 2002 10. Absorptive capacity co-evolves withcombinative capabilitiesAbsorptive capacity ... depends on past and cumulative experiences is not static, but rather co-evolves through combinative capabilities Coordination capabilities enhance knowledge exchange acrossdisciplinary and hierarchical boundaries (e.g., cross-functional interfaces,participation in decision-processes, and job rotation) System capabilities refer to the organizational and individual knowledge(e.g. the formalization and routinization of organizational actions). Socialization capabilities capture aspects of social relations (e.g. thedensity of social linkages (structural aspect) and shared social experience(cognitive aspects) in an organization, and between the organization and itscustomers)Sources: Bosch, Volberda and Boer, 1999; Jansen, Bosch and Volberda, 2005; Kogut and Zander, 1992. 11. Context variables interact with co-evolvementAbsorptive capacity and value innovation linkage ... is moderated by contextual variables Organizational form Strategy & strategic behavior Network position & behaviorSources: Lane, Koka and Pathak, 2006; Lichtenthaler, 2009; Tsai, 2001 12. Our conceptual framework has been appliedto diametrical case studiesCharacteristics Alpha BetaStrategic innovation Limited (Low degree ofstrategic innovation) Comprehensive (High degree ofstrategic innovation)Examples Few information and consultingservices for supportinghouseholds and industry in orderto reduce electricity consumption Service provision for photovoltaic,services for planning, financing, andrunning fleets of electric cars, consultingand monitoring services for reducingelectricity consumptionBusiness model &value constellation Substantiating existingbusiness model on sellingelectricity Exploiting existing valueconstellation of providingelectricity at reasonable prices Changing the business model from sellingelectricity to benefiting from customerproducing renewable energies Changing the business model form sellingto electricity to benefiting from customerselectricity reductions Exploring new value constellations inexisting markets and uncontestedmarket spacesMarkets Exploiting the existing market Opening up new markets surroundingrenewable energies, electric mobility andself-service technologies for monitoring andreducing electricity consumptionValueimprovement Incremental valueimprovement Leap in value improvement 13. Contextual variables show strongmoderating effectsPotential absorptivecapacityKnowledge acquisitionKnowledge assimilationDegree of realizedabsorptive capacityfor value innovationIndependent variable Dependent variableStrengthening (Beta)Late Follower & observant behaviorLittle centrality in the knowledgenetwork positionParticipating in the knowledgeexchange, information channeling anddistributing within the knowledge networkLowHighWeakening (Alpha)First mover & proactive behaviorHighly central position in the knowledgenetworkDominating information channeling anddistributing in the knowledge network 14. Combinative capabilities mediate thepotential and realized absorptive capacity (1)Potential absorptivecapacityKnowledge acquisitionKnowledge assimilationDegree of realizedabsorptive capacityfor value innovationIndependent variable Dependent variableMediator variableLow (Alpha)Knowledge acquisition and assimilation was merely a reaction to occurringcustomer needsSocialization tactics aimed at understanding customer needs and expectationsConnectedness focuses mainly on the relationship with existing customersKnowledge sources overlap substantially and are highly complementaryRelatively fast learning processes throughout the knowledge acquisition andassimilation processesHighly formalized of knowledge acquisition and assimilation with respect tocustomer needs and expectationsLow 15. Combinative capabilities mediate the potentialand realized absorptive capacity (2)Potential absorptivecapacityKnowledge acquisitionKnowledge assimilationDegree of realizedabsorptive capacityfor value innovationIndependent variable Dependent variableMediator variableHigh (Beta)Deliberate knowledge acquisition with respect to trends in various technologicaland psychological fieldsSpecific coordination capabilities for integrating the different knowledgesourcesAnticipation of new value opportunities emerging through a combination of sociallyconstructed experiences surrounding electricity consumption, technologicaldevelopments and legal changesSocialization of an in-depth understanding of how customers perceive the socialconstruction surrounding electricity consumptionBetas knowledge source exhibits little overlap and yields few complementaritiesRelatively slow learning processes throughout the knowledge acquisition andassimilation processesInformal routines and processes of knowledge assimilationHigh 16. Following similarities and differences wereobserved in the contextual variablesAlphas low degree of valueinnovationBetas high degree of valueinnovationSimilaritiesAlpha and Beta have formed a matrix organizationDifferencesAlphaFirst moverProactive behaviorHighly central position in the knowledgenetworkDominating information channeling anddistributing in the knowledge networkBetaFollowerReactive behaviorLittle centrality in the knowledge networkpositionParticipating in the knowledge exchange,information channeling and distributingwithin the knowledge network 17. Following similarities and differences wereobserved in the potential absorptive capacityAlphas low degree of value innovation Betas high degree of value innovationSimilaritiesAssessing external knowledge sourcesPast experiencesDifferencesAlphaKnowledge acquisition and assimilation was merely areaction to occurring customer needsSocialization tactics aimed at understandingcustomer needs and expectationsConnectedness focuses mainly on the relationshipwith existing customersKnowledge sources overlap substantially and arehighly complementaryRelatively fast learning processes throughout theknowledge acquisition and assimilation processesHighly formalized of knowledge acquisition andassimilation with respect to customer needs andexpectationsBetaDeliberate knowledge acquisition with respect totrends in various technological andpsychological fieldsSpecific coordination capabilities forintegrating the different knowledge sourcesAnticipation of new value opportunities emergingthrough a combination of socially constructedexperiences surrounding electricity consumption,technological developments and legal changesSocialization of an in-depth understanding of howcustomers perceive the social constructionsurrounding electricity consumptionBetas knowledge source exhibits little overlapand yields few complementaritiesRelatively slow learning processes throughout theknowledge acquisition and assimilation processesInformal routines and processes of knowledgeassimilation 18. Following similarities and differences wereobserved in the realized absorptive capacityAlphas low degree of value innovation Betas high degree of value innovationSimilaritiesPromoting mutual understanding and comprehension of value-creation opportunitiesConvergence on the political intentionsDifferencesAlphaLimited variety in cognitive structures oforganizational membersConventional managerial thinking is thedominant mind-setOrganizational members exhibit minimal role &gender diversityLooking for certainty in exploiting knowledge forcommercial purposesCoordination, systematization, and socializationcapabilities enables the transformation andexploitation of knowledge through the conceptionof planned strategyPlanned strategy restricts managerialcognition in using incremental value innovationsfor increasing the general quality of customerrelationshipsBetaStrong variety in cognitive structures oforganizational membersEntrepreneurial thinking is the dominant mind-setOrganizational members exhibit high role &gender diversityAllowing uncertainty to emerge with respect toknowledge exploitation achieves commercial endsCoordination, systematization, and socializationcapabilities enables transformation and exploitationof knowledge through the conception of anumbrella strategyStrategic directions and scenarios inherent in theumbrella strategy facilitate managerialcognition of leaps in value innovation, uncontestedmarket spaces, and new value constellations 19. Based on the findings, we can draw followingtheoretical implicationsGeneral theoretical implications Specific theoretical contributions We depart from the existingpreoccupation with analyzingabsorptive capacity and directinnovation outcomes. Absorptive capacity andcombinative capabilitiescontributes to a betterunderstanding of valueinnovation processes a richer, even morebehaviorally groundedcharacterization (Cohen andLevinthal, 1997, p. 1468) Changes in the level of realized absorptive capacitycannot be attributed to a single combinativecapability, but through complex interactions(coordination, system, and socialization capabilitiesand absorptive capacity) Positive associations: interfaces with diverseset-of external and internal knowledge sources, forroutines for knowledge sharing, comprehensivelyunderstanding consumer psychology, and gender& behavioral diversity Negative associations: hierarchical andcentralized decision-making authority Contextual variables: Strategy & strategic behavioris counter-intuitive, dominant network behavior &position limits absorptive capacity, organizationalform has no impact 20. Our study offers managerial guidance forvalue innovations, but also entails limitationsManagerial guidance Limitations Evaluation the appropriatenessof value innovation initiatives. Assessment of how knowledgeis acquired, and assimilated, Managers should be also aware ofthe limitations of the first-moverstrategy, and be more observantof their network position andbehavior Generalization remains unclear, even thoughthis new mode of analysis seems promising. Qualitative measures to capture the differentdegrees of value innovation and realizedabsorptive capacity Latest advances on the subject of absorptivecapacities: Process-based definition of absorptivecapacity and identifies technological andmarket knowledge. Exploratory, transformative, andexploitative learning process are keyissues in absorptive capacity and influencepositively firm performance.Sources: Lane et al. (2006); Lichtentaler (2009) 21. Thank you very much for your attention