You've probably heard the old fable about the frog. If you throw the frog into boiling water, he'll immediately jump out. Conversely, according to the fable, if you put the frog in water at a temperature the frog likes, then slowly … very slowly … raise the temperature, the frog won't jump out. In fact, the frog will die, because the slowly rising water temperature will make the frog lethargic, eventually so lethargic that he won't have the energy to jump out.
Some biologists say it's truly just a legend, as all frogs would jump out before it's too late, but let's assume the frog really will stay until it's too late.
The frog fable provides a great metaphor for change in business. Obviously, the energy industry is changing. And thanks to global warming, the water is definitely getting warmer. The question is, can the leading players (frogs) in today's carbon-centric energy industry adapt to the emerging new world of warming/boiling water?
Maybe … maybe not.
How One Company Jumped Out of the Water in Time
History tells us that big corporations can sometimes make the change. Probably the most famous example of this is Intel, the computer chip company. There's a very good chance the device you're using to read this post is powered by a chip made by Intel.
But Intel prospers today by selling a very different product than when it was founded. In 1968, Gordon Moore … the same guy who formulated Moore's Law … and Robert Noyce left Fairchild Semiconductor to found Intel. The company's original product was memory chips. They were joined by a fellow named Andy Grove, also a veteran of Fairchild.
Intel rode the computer boom of the 70's and early 80's, becoming the leading purveyor of memory chips. Everything was going great until the company was suddenly undercut by cheap Japanese imports. You probably haven't thought about "cheap Japanese imports" for a very long time, but it was a big deal in the early 1980's.
Intel went from making lots of money to hemorrhaging. Being a highly innovative company, the conventional wisdom said the company could out-innovate the Japanese and regain its profitable lead. Maybe.
Which was the prelude to a famous conversation between Gordon Moore, Intel CEO, and Andy Grove, his trusted deputy. Grove reportedly posed the following question to Moore: "If we get kicked out and the board of directors brought in a new CEO, what do you think he would do." Moore reportedly responded, "he would get us out of making memory chips." Grove's famous question in reply was, "why shouldn't you and I walk out the door, come back and do it ourselves?"
In fact, that's what they did. I don't know if Moore and Grove literally walked out of the office and then back in, but Intel got out of the money-losing memory chip business and re-focused entirely on the emerging business of processors. You know, the "Intel Inside" devices in your computer. Intel is the world's leader in that business today. Memory chips are just that … a memory.
The story of Intel's transition is famous, probably because it is a rare success. Most of the time, big incumbents don't do transitions very well.
Microsoft blew the opportunity of producing a mobile phone.
` Big retailers have missed the opportunity to be Amazon before Amazon did it.
Can Big Oil Repeat the Story?
You can make the argument that today's major oil companies are in a somewhat similar situation. They dominate their current businesses, but planners in those companies can see a world of "Peak Oil" (meaning peak demand for oil) and renewables rapidly approaching.
Now the situations are a little different. Intel was losing money, and Big Oil definitely isn't losing money. Perhaps it would be better if they were losing money. The force of inertia may be compelling. Yes, renewables may be coming, but they're still a long way off, so to speak, and Big Oil continues to make lots of money.
So Big Oil is hedging its bets by making some investments in renewables. Royal Dutch Shell is now investing about $ 1 billion a year in renewables, a very big number … until you consider that the company spends $ 25 billion/year in total capital spending. Shell has purchased a company that recharges electric vehicles. Like much of Big Oil, Shell has a huge retail distribution network, so adding electric charging is a natural. Plus, they've got convenience store outlets on site. Do your grocery shopping while you recharge your car.
Total, the French oil major, has probably invested the most. For example, they've purchased two thirds of solar solutions provider Sun Power, as well as a battery company called Saft.
Other oil majors have also made investments, but so far, no one has "bet the farm" the way Intel did. The water just isn't hot enough yet.
Why Automakers Should Be Able to Jump Out in Time
There's another industry that could face the same problem, but they'll likely be more successful … automobile manufacturers.
The world's top auto manufacturers already can see the emergence of electric vehicles. They even have new competitors, principally Tesla. But the auto manufacturers will probably make the transition successfully because gas powered engines are only a part of each automobile. While the engines are changing, the rest of the typical vehicle isn't. Not only that, the process of distributing and financing vehicles isn't likely to change.
The big automakers are already adapting to an electric world, and probably should do well.
Creating a Better Strategy for Big Oil
So imagine you're a member of the board of directors of a major oil company. You can see that the world is moving towards renewables and away from the carbon-emitting products your company products. Not only that, you can see that the long term economics will likely favor renewables. Which means you can foresee a slow motion train wreck. Your situation is a little different from the one faced by Gordon Moore and Andy Grove at Intel. What should you do?
I think you should do three things.
#1: Assume the train wreck is going to happen
Start off by assuming that renewables are going to displace oil and gas as the primary fuel source in the future. Not next week … not next year … but in the not too distant future. If you assume that's going to happen, you'll redirect an ever larger portion of the capital budget to alternative investments.
Now it's unclear which new technology, and which companies, will prevail. Given that, Big Oil should then take a page out of the Silicon Valley playbook.
#2: Take a portfolio approach to investing in future technology
Venture capitalists, and angel investors like me, would like to think we know what tomorrow's top companies will be. But if we think we do, we're fooling ourselves. We don't know. Because we don't, we take a "portfolio approach" to investing. The idea is to create a portfolio of emerging companies. Experts say the portfolio should include anywhere from 20 to 30 ventures. The rule of thumb is that for every 10 ventures in which you invest, expect 5 to be complete failures, a couple to return your investment capital and possible a small return, and one or two to be big winners.
The one or two big winners will provide a fantastic overall return to the portfolio.
So the typical Big Oil company should probably create a portfolio of alternative energy investments. Half will probably be complete washouts. But if the investment strategy is sound, at least one of the investments will be the Facebook or Amazon on alternative energy.
#3: Operate the new businesses totally apart from the core business
Big Oil can easily make these investments out of existing cash flow. They can certainly provide a good rationale to their investors. I have a feeling the investors will applaud the decision.
But there's one other thing they need to do, and it's the one thing that may be the very hardest of all: operate these businesses completely independently of the Big Oil veterans.
Don't let anyone associated with the Big Oil part of the business anywhere near the venture portfolio. The reason isn't because the Big Oil people aren't good managers. They most certainly are. The problem is that they are very good managers in the business they know – Big Oil - so they will almost invariably bring a Big Oil mindset to these new businesses. Those mindsets could kill the investments.
The Board of Directors should put the venture portfolio completely apart. In fact, they might even hire one of the top Silicon Valley firms to run the portfolio for them. The venture firm would then report directly to the Board of Directors. No connection with the CEO of the Big Oil firm. So two people would report to the Big Oil Company Board of Directors: the Big Oil CEO and the head of the new venture portfolio.
Taking a Page Out of the CIA Playbook
The strategy is not without precedent. The Central Intelligence Agency has its own venture capital operation, called InQTel. IQT's portfolio includes more than 200 venture investments. Needless to say, the venture companies aren't being run by the spooks in Langley, at least not directly. At the same time, if any of those 200+ companies produces a major breakthrough, someone in Langley will likely be paying attention.
Admittedly, a very unusual strategy. But Big Oil faces a very unusual situation. It can see a slow motion train wreck getting ready to happen. It knows the story of Intel. It also knows what tends to happen to innovation strategies that are managed by company veterans who come from the traditional side of the business.
Big Oil has a challenging future, but it still could be a great one, even in the future world dominated by renewable energy. So, fable or not, the water is literally getting warmer. Will the frog absorb the lesson and jump in time?
