Importance of new business models

The Economist’s latest Technology Quarterly has it normal set of hot new techie ideas (literally since the lead story is on geothermal energy). It also has this interesting piece — Energy in the developing world: Power to the people. The gist of the piece is that we already have the technology, we now need the innovation:

Providing energy in a bottom-up way instead has a lot to recommend it. There is no need to wait for politicians or utilities to act. The technology in question, from solar panels to low-energy light-emitting diodes (LEDs), is rapidly falling in price. Local, bottom-up systems may be more sustainable and produce fewer carbon emissions than centralised schemes. In the rich world, in fact, the trend is towards a more flexible system of distributed, sustainable power sources. The developing world has an opportunity to leapfrog the centralised model, just as it leapfrogged fixed-line telecoms and went straight to mobile phones.
But just as the spread of mobile phones was helped along by new business models, such as pre-paid airtime cards and village “telephone ladies”, new approaches are now needed. “We need to reinvent how energy is delivered,” says Simon Desjardins, who manages a programme at the Shell Foundation that invests in for-profit ways to deliver energy to the poor. “Companies need to come up with innovative business models and technology.”

For those who don’t remember, the village telephone ladies were women who formed companies or coops to buy a cell phone and then rent it out by the call to other villagers. It was (is) a critical step in the adoption of the technology – as the cost was generally out of reach of any one single villager. The telephone ladies is one of the shining examples of the success of micro-financing. Thus, there were two business model innovation powering the spread of mobile phones in these villages: the service delivery model and the financing model.
I whole heartedly agree with the Economist that new business models are a key to the energy issue. Later in the piece they provide a number of examples, such as these two:

One idea is to use locally available biomass as a feedstock to generate power for a village-level “micro-grid”. Husk Power Systems, an Indian firm, uses second-world-war-era diesel generators fitted with biomass gasifiers that can use rice husks, which are otherwise left to rot, as a feedstock. Wires are strung on cheap, easy-to-repair bamboo poles to provide power to around 600 families for each generator. Co-founded three years ago by a local electrical engineer, Gyanesh Pandey, Husk has established five mini-grids in Bihar, India’s poorest state, where rice is a staple crop. It hopes to extend its coverage to 50 mini-grids during 2010. Consumers pay door-to-door collectors upfront for power, and Husk collects a 30% government subsidy for construction costs. Its pilot plants were profitable within six months, so its model is sustainable. [emphasis added]
Emergence BioEnergy takes this approach a step farther. Its aim is to provide many entrepreneurial opportunities around energy production, says Iqbal Quadir, the firm’s founder, who is also director of the Legatum Centre for Development & Entrepreneurship at the Massachusetts Institute of Technology (MIT). A cattle farmer in a small village in Bangladesh might, for example, operate a one-kilowatt generator in his hut, powered by methane from cow manure stored in his basement. He can then sell surplus electricity to his neighbours and use the waste heat from the generator to run a refrigerator to chill milk. This preserves milk that otherwise might be spoilt, offers new sources of income to the farmer (selling power and other services, such as charging mobile phones or running an internet kiosk) and provides power to others in his village.

But I would go even further. The issue is not simply one of new business models to spread adoption of existing technology. Nor is it just in developing nations. Changes in business models are needed in “developed” nations and go well beyond technology diffusion. Zipcar is still one of my favorite examples. Bikesharing is another.
So where are the policies to help foster and development new business models? One would be an expansion business incubator and start-up assistance services. The EDA reauthorization bill includes some of these programs (see earlier posting). We will see if Congress acts on this legislation — and, more importantly, appropriates the money to actually fund the programs.
But incubators are just one example of the types of new policies we need. Putting together an innovation strategy that understands the role of organizational innovation and new business models would be the first step.

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