Unlocking innovation to lead in the energy transition
Conditions are also ripe for innovation-led growth that targets new value pools, products, and services. Demand is strong and rising, but adoption of potential solutions is low, and technologies and business models to support the energy transition are still emerging.
In this post, we outline nine key questions that can help executives supercharge innovation in the energy transition.
1. Do we have a clear, ambitious target for the size of the growth opportunity through innovation?Without a clear target, “best efforts” can fall short, and priorities can shift unintentionally. High-performing organisations develop calibrated aspirations: to embrace decarbonisation and financial targets. They then create a “momentum case” for the business by considering the impact of disruption in the transition and adding existing strategic initiatives to identify the gap that innovation needs to fill.
2. Do we understand how the energy transition will reshape value pools in our markets?The energy transition is fundamentally reshaping existing carbon-intensive profit pools and creating new ones with lower carbon intensity. To navigate this, companies often map distinct value pools for further investigation and consider these in relative proximity to the core business. It is vital to think expansively to capture emerging pools. Understanding the key drivers that are reshaping these pools—namely, shifting consumer preferences and investor attitudes—is a critical part of building these insights.
3. Is our view of the future founded in realistic scenarios?The energy transition contains considerable uncertainties, such as the extent of electrification or use of hydrogen in modes of transport. Just as high performers managed uncertainty around the COVID-19 crisis through scenario-based planning, businesses that have a realistic vision of how their own world may evolve can then build robust strategies.
4. Do our business plans create clarity on assumptions and uncertainties?Many business plans contain a few paragraphs on risks. All business plans include a range of assumptions and uncertainties, but few give these issues enough airtime. Leading companies make the ranges of these uncertainties explicit, then judge progress in narrowing the range through trial and error. This learning experience is particularly useful when targeting a change in customer behaviour, such as the adoption of electric vehicles or an uptake of alternative proteins.
5. Do we have a risk-adjusted portfolio of initiatives for growth?Innovation portfolios typically map initiatives to a matrix, with timing of impact on one axis and familiarity on the other. A risk-adjusted portfolio has initiatives across all timelines, with high familiarity in near-term growth initiatives and less familiarity further out. To project expected values at a portfolio level, cloud-based tools also allow companies to run simulations across assumption ranges within individual business plans. Moving ahead, these tools can be combined with advanced carbon tracking to measure the climate impact of initiatives.
6. Are we reallocating resources dynamically?A 100 percent success rate on initiatives signifies insufficient ambition. A portfolio should be dynamic, with regular reviews leading to reallocation of funding. An annual cycle is typically insufficient; quarterly reviews are preferable. This is particularly important for companies with a legacy in carbon-intensive industries. Achieving this reallocation of resources can be a cultural challenge due to the need to embrace the value in trial, error, and learning.
7. Do we have the right talent in place?Almost 90 percent of executives say their organisations currently face skill gaps or will do so in the next five years. Most organisations are unlikely to have sufficient skills for managing an innovation portfolio and for executing on individual business cases. A talent strategy that identifies gaps, then balances upskilling, hiring, and partnering to fill these gaps, is key. Anecdotal evidence indicates this balance could result in a win-win because companies with ambitious environmental, social, and governance (ESG) strategies may attract better talent.
8. Does our company have an ‘ambidextrous’ operating model?Incumbents face a natural fear of cannibalisation and competition for capital from the core. This fear is hard to shake, even though inaction on energy transition creates increased risks to the sustainability of that very core. We advocate an “ambidextrous” model, in which innovations can benefit from the advantages of the existing business (such as cash generation and capabilities) while not being stifled by the control framework of business-as-usual governance. The structure and membership of the “innovation board” is key to this model.
9. Is our governance creating conditions to take the appropriate risk?Risk management is a critical board function, and we often see a bias toward risk mitigation. Innovation is inherently risky, so leading boards will deliberately create conditions that encourage project and management teams to take an appropriate level of risk, and actively engage with setting that risk tolerance. One practical solution is to form a dedicated subcommittee focused on innovations in decarbonisation, with members who are known innovators.
The energy transition will continue to unlock increasing growth in new value pools. Innovating now is critical to owning a share of that growth. By examining the questions above, executives can start to understand how well positioned they are to seize this generational opportunity.