“How do you make these big bets and when? When everyone can see that the economics makes sense, it’s usually too late.”
There was a story in The Wall Street Journal about utilities that made a big bet into renewables 15-20 years ago and are starting to see their valuations increase to match that of the traditional oil giants. How do you value and build a business case for R&D and innovation?
I have worked with the most senior leaders in oil and gas, 15-20 years ago, when they were making the decision if they should invest in renewables. Some decided to invest in renewables and some didn’t. At that time, nobody knew what was going to happen. You have to make a bet on a technology that’s unproven, but you’re betting that it will improve to the point where you start generating profit. So, how do you make these big bets and when? When everyone can see that the economics makes sense, it’s usually too late.
Do we believe that the technology we want to install to make our coal stations carbon neutral are actually going to work? Because if they fail we actually going to be penalized for the next 40 years. Talk about big bets!
Do we go down the path of an unknown nuclear technology that’s been unproven but could potentially save us 50% of the operating and capital costs?
How do you make those decisions?
You need a hybrid, two-speed corporate strategy
The deep insight is this: You need a hybrid strategy. You need a two-speed corporate strategy.
On the one side, you have to continue maintaining and investing in your legacy assets because they produce the cash flow that’s going to fund you into your new assets, and R&D is expensive. When you take the capital from the legacy assets to make some big bets, you must make sure you’re picking a trend that makes sense. How you’re going to succeed in that trend, and where you’re going to play in the value chain—that’s corporate strategy, you can see it in the study.
But you have to do two things: have a hybrid model, two-speed model, and keep your legacy assets and you got to switch.
You’re seeing many companies doing this right now. Just about every oil and gas major is looking at it, sovereign wealth funds and even Norway—which built most of its wealth from oil and gas—is still keeping the oil and gas investments, but it has a plan to migrate and transition.
You can’t abandon legacy assets; you’ve got to nurture them. But you have to start the process to transition, and the process doesn’t happen overnight. It’s a 10-15 year process. So if you haven’t started the plan to transition, you’re setting yourself up for a 15-year journey. And you might as well start now.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #9.
Want to learn more about how FIRMSconsulting can help your organization?
A strategy expert vs. a CEO I'm going to end today's Strategy Insights by talking about a client and some of the challenges, successes and particularly one of the deep insights we developed for this client. This client is named Raka, and she’s of Indian origin. She has worked at…
Sanctions Are Like Punishing Your Spouse by Letting Them Date Other People The next big theme is called, “Sanctions Are Like Punishing Your Spouse by Letting Them Date Other People.” That’s a funny sounding headline. What am I talking about? Imagine you had a spouse, and you don't think they…
Three people that influence you the most The first big theme is titled, “The Three Most Influential People in the World: Roula Khalaf, Gwen Robinson, and Matt Murray.” This is a very deep insight. We have a lot of coaching clients, including very senior coaching clients. I’ve asked our coaching clients,…
We are using cookies on our website
Please confirm, if you accept our tracking cookies. You can also decline the tracking, so you can continue to visit our website without any data sent to third party services.
Are you a leader or an analyst?
Sign up to receive exclusive preview episodes from powerful training programs with ex-McKinsey, BCG et al., partners. Learn the skills to become a leader and contribute to the world.
This is your time. Your stand begins now.