Boston-based Zipcar (Nasdaq: ZIP ) raised $174 million from its initial public offering in April. It already operates in 14 big cities and on 230 college campuses around the United States, Canada, and the U.K. and is planning to use the new capital for market expansion. Zipcar is not a high-tech business, and its success is not due to sophisticated technological innovation; rather, it's an example of business model innovation.
Zipcar reinvented the traditional car-rental business by simplifying and reducing the costs for short-term rentals and rebranding the service as green car sharing. They developed a distributed model of rental locations, an annual membership system, an all-inclusive by-the-hour pricing structure, and online booking. Together, these greatly reduce the cost and time needed to rent a car while maximizing convenience. Indeed, most of the people I know who use Zipcar's service are not ardent environmentalists but enjoy the hassle-free approach and the easy parking.
While public policy and the media tend to focus on technological innovation as the key to addressing climate change and boosting clean energy, business model innovation (BMI) offers a path to rapid deployment of existing technologies. The concept was popularized by Mark Johnson, Clayton Christensen, and Henning Kagermann in their December 2008 Harvard Business Review article "Reinventing Your Business Model." As they point out: "Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation."
The potential for BMI in the development of the cleantech sector is only just beginning to be appreciated. Rob Day, a partner with Black Coral Capital in Boston, recently wrote about a new wave of startups that run lean and require less capital to scale up, and so are less likely to founder in the infamous Valley of Death: "Some of this next wave of startups will be hardware, but many will be software and/or services. … Business model innovation will often be stressed over technological innovation. They will sometimes marry energy-related market opportunities with Web2.0 and social media business models and platforms."
A closer look reveals that BMI holds particular promise for unlocking the potential of clean energy and promoting economic competitiveness, investment, and employment in high-cost regions. In addition to helping keep startups lean and capital-efficient, BMI can develop systemic solutions that overcome some of the many market failures and institutional barriers to energy efficiency and clean energy. McKinsey's famous Marginal Abatement Curve heralds the good news that about one-third of needed emissions reductions appear to have positive ROI with current technologies. The bad news is that about one-third of needed emissions reductions appear to have positive ROI yet the necessary investments are not happening, because of these many hurdles. As with Zipcar, BMI provides ways to monetize the ancillary benefits of cutting emissions and create business models that focus on features that people are willing to pay for.
BMI-based cleantech businesses are also more likely to keep jobs in high-wage regions such as the U.S. Northeast and California. Clean-energy manufacturing jobs have been moving astonishingly quickly to China, even while there is still rapid technological evolution. Evergreen Solar (Nasdaq: ESLR ) and A123 Systems (Nasdaq: AONE ) , both based in Massachusetts, are cases in point. Business model innovation often focuses on software and services, developing strong relationships with customers, and building on existing capabilities in the region, so jobs are more likely to stay local. These factors also help to create barriers to entry, protecting the business model. Zipcar's network of parking spots, for example, negotiated over several years with hundreds of companies and local authorities, would not be easy to replicate.
Better Place is a powerful example of how BMI can overcome systemic barriers to technology deployment. The company is developing a national replaceable-battery infrastructure for pure electric vehicles in Israel, Denmark, and elsewhere that transforms the business model for car ownership and fuel supply. Consumers buy a car without the expensive batteries and then contract with Better Place for battery replacement as a service, which is done in just a few minutes at a network of service stations. This model overcomes the physical limitations of batteries, in terms of range and charging time, and dramatically reduces the cost of new cars for consumers. As with Zipcar, governments are willing to subsidize the operation because it contributes toward reducing congestion and greenhouse gas emissions -- again, monetizing ancillary benefits.
Energy efficiency and smart grid provide many opportunities for BMI. EnerNOC's (Nasdaq: ENOC ) core business model, for example, is demand response and energy management, using sophisticated software and remote monitoring and control. EnerNOC links the utilities, which are willing to pay for energy efficiency and for peak-period demand reduction, to a network of customers. Energy-service companies such as Ameresco (NYSE: AMRC ) are increasingly offering turnkey projects and performance contracts that reduce risks, capital requirements, and uncertainty for customers. Similarly, companies such as Nexamp, Tioga Energy and Borrego offer renewable-power purchase agreements based on DBOOM services -- a complete package where the company designs, builds, owns, operates, and manages the renewable-energy installation, while the customer pays only for power.
Not surprisingly, then, these BMI-based companies are among the fastest growing businesses in the cleantech sector. Kevin Doyle, a principal of Green Economy and co-chair of the New England Clean Energy Council's Workforce Development Group, has pointed to the large number of employment opportunities at a range of cleantech companies, a number of which are in energy services and software. As a result, they are looking not just for engineers, but also for a range of business and professional skills and expertise -- which highlights the purpose of our new clean-energy programs at the University of Massachusetts, Boston!
David L. Levy is the chair of the Department of Management and Marketing at the University of Massachusetts, Boston, where he teaches courses in international business, strategy, and business and climate change. He recently founded and is now the director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education, and outreach to promote a transition to a clean, sustainable, and prosperous economy. David's research examines corporate strategic responses to climate change, the growth of the clean-energy business sector, and the emergence of carbon disclosure as a form of governance. He was recently the principal investigator on a grant from the Massachusetts Clean Energy Center to develop sustainability education programs. He edits the blog Climate Inc. on business and climate change.
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