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Hoffman, Andrew
  Andrew Hoffman
 

Charging into a New Market

8/20/2010 --

Andy Hoffman directs case study that examines the needs of electric car owners.

ANN ARBOR, MICH. — New electric vehicles and plug-in hybrids like the Chevrolet Volt and Nissan Leaf are hitting the market and grabbing plenty of headlines. But how many consumers will grab these vehicles, especially since they come with added cost? Where is the infrastructure to sustain and recharge the all-electric vehicles on long-distance trips? Other issues looming on the horizon include competing technologies (such as fuel cells), more efficient gasoline engines, high-efficiency diesels, plug-in hybrids, and biofuel or flex-fuel vehicles.

Stepping into this uncertain market is Better Place, a company founded by a former SAP executive, which delivers a business model seeking to remove the battery as a consumer cost and extend the driving range of vehicles. Owners would pay fees for the use of batteries, similar to a cell phone contract. Charging stations and swapping stations (where spent batteries could be exchanged for fully charged ones) would bring electric vehicles more in line with the price and ease of use of gasoline-powered models.

To that end, Better Place has forged partnerships with automakers, battery suppliers, and governments. But the market remains small, the technology is still evolving, and its partners are moving in many directions at once.

Andy Hoffman, associate director of the Erb Institute for Global Sustainable Enterprise, was adviser to the authors of the case study "Better Place: Charging into the Future." The case examines the strategic and tactical implications of this new energy space. The study also reveals some of the entrepreneurial spirit underlying Better Place's ventures. Authors of the case are Class of 2010 Ross MBA graduates James Boomis, Ann Racek, Justin Turner, Brian Van Abel, and Arie Jongejan. In the following Q&A, Hoffman, Holcim (U.S.) Professor of Sustainable Enterprise, helps navigate the business twists and turns of the new energy landscape.

As the case points out, the market size for hybrid vehicles is not clear, and it's uncertain which type of battery system/technology will prevail. Yet there seem to be a lot of companies like Better Place entering the fray. Why do you think that is?

Hoffman: The success of electric cars depends on the development of the on-board battery storage as well as changes in infrastructure to make them work. Markets will be limited as long as driving distance is limited to several hundred miles. To make them work, systemic and institutional change must accompany the technological change. Think back to the early days of the gasoline-powered vehicle: We needed a system of gasoline stations to make them work. This is the same situation; we are (or are not) on the verge of that new frontier. Companies are jumping to provide that infrastructure in anticipation of capitalizing on the development of the on-board technology. They expect the technological and market shifts to come, and they are working to hasten their arrival.

It would seem that companies like Better Place aren't dealing from a position of strength. Many of their partners also are moving in different competing directions at once because even they don't know what will happen. How does this change traditional relationships and corporate strategy?

Hoffman: The technology and marketplace are still in flux, and no one knows exactly how they will play out. So you hedge your bets as much as you can, develop a diverse portfolio of technologies and partnerships, keep informed of changes in the marketplace and lab, and try to influence the outcomes to favor your strategy and platform. Diversification is the key.

Better Place's future depends on a lot of things out of its control. Even if it does everything right, the venture still could fail. How does a CEO control for the uncontrollable?

Hoffman: We are in the midst of an energy renaissance, which means uncertainty but also opportunity to the wise and motivated. To control risk, I refer back to my earlier statement: Develop a diverse portfolio of technologies and partnerships, keep informed of changes in the marketplace and lab, and try to influence the outcomes to favor your strategy and platform. But we should think of these efforts all being driven by a market shift that is in play. We are in the midst of that shift, and it's driven not just by climate change but by such other factors as the desire to reduce reliance on foreign oil, avoid oil-associated risks like the BP spill, and remain competitive in the face of anticipated technological development in places like China and Germany. The field is open to entrepreneurs to capitalize on the shift. When I first started teaching environmental strategy, I wanted to teach students how to go into big companies and get them to see the opportunities in green. Now I see students who don't want to go into big companies; they want to start their own. They see an opportunity – one that others may not be able to see. I like to quote William Gibson as a way to encourage their exploration of these opportunities based on their own particular vision: "The future is already here; it's just unevenly distributed."

In your experience, have companies like Better Place been able to adapt if the market or technology go in a direction other than that in which they've already invested?

Hoffman: Some do, some don't. It all depends on the diversity of their portfolio and their ability to see a shift and then adjust at the right time and in the right way. It is core business strategy, not unlike innovations in other sectors. We've been watching the demise of the CD store and now the DVD rental store. Did Blockbuster see the shift and adapt in time? We'll see. This is no different than seeing the market shift around environmental issues.

The CEO of Better Place, Shai Agassi, left a nice position at SAP and launched this company as a calling — something he wanted to do to contribute more to society. What are the advantages and disadvantages to launching a business (especially in an uncertain market) with that in mind?

Hoffman: There is great power in seeing your life's pursuits as a calling or vocation. You must be careful not to allow your enthusiasm to cloud your vision and judgment, but if you truly believe in your cause, you will be motivated to do things others will not. They say that a man will be motivated by a dollar, even more so for another man, but he will die for a cause. If someone deeply feels the idea of a calling, purpose, or vocation, he or she will give everything to realize its success. I see that in a growing number of students, which is inspiring and gives me hope for the future. But, again, one cannot and should not allow their vocational enthusiasm to cloud their judgment and channel them into seeing the world only as they want it to be, and not as it is.

As the world looks for ways to reduce oil consumption and cut carbon emissions, do you think we'll see more people like Agassi taking a leap and, if so, how is the shakeout likely to go?

Hoffman: Yes, absolutely. This is a part of the market shift I am describing. The thing about a renaissance — such as our current energy renaissance — is most people don't know it's happening when they are in the midst of it. They only know it afterwards. But if you want to capitalize on the opportunities that are created, you must get in early. By the time a stock is posted on the cover of Bloomberg/BusinessWeek, it's too late to ride its growth. You need people who can see the opportunity before others, develop a strategy to capitalize on it, and then, importantly, do the work necessary to make their strategy a success.

Better Place was launched with $200 million in venture capital – quite a tidy sum. Has investor enthusiasm for these types of ventures waned, increased, or stayed the same since then?

Hoffman: Investor activity in all areas has waned with the financial crisis. But many see the opportunities in these technologies. I don't like to use the word "green" technologies. These are new technologies that are coming to maturity, period. I think these areas will grow first and faster than others. And Better Place is doing okay — they just secured another $350 million in funding earlier this year.

One thing I want to state strongly is that you don't have to believe in the science of climate change, or any other environmental issue, to see it as a business issue. It helps your ability to recognize distant signals before they alter your markets. But ultimately, the markets are altered when regulation, investors, consumers, banks, suppliers, and buyers all drive the market shift. They've been doing that on environmental issues for several decades, and companies that ignore these shifts do so at their peril. Asking, "Does it pay to be green?" is nonsense. In a market shift, you must innovate. Asking if it pays to be green is like asking if it pays to innovate. It depends on who does it, when they do it, and how they do it. That is the essence of business strategy, and that is the way to view the business shift that is underway.

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu