Metabolix and the Wave

March 26 2007

Metabolix stock looks like a hit. The Cambridge-based company produces “green plastics” from biomass – materials like wood or corn which can decompose over time. This contrasts with petroleum-based plastics, which do not biodegrade.

Since the company went public last October, its stock price has moved from about $15.50 to a high of over $20. It is currently trading at around $18. It has a production partnership with agribusiness giant ADM and a market cap of around $350 million.

Metabolix’ biodegradeable plastics

Carl Berke is the Associate Director of the Center for Innovative Ventures at Partners Healthcare. He has been following green plastics for over twenty years, both as a research scientist (he has his PhD in chemistry), a concerned citizen (he served on the town of Brookline’s Solid Waste Advisory Committee for 2 years), and an investor.

Berke passed on the opportunity to invest in Metabolix before it went public, when its capitalization was around $100 million, and (perhaps as a result) remains skeptical about the long-term prospects of the business.

He’s not alone in his skepticism. In December, 2005, I wrote about the dissolution of a Dow-Cargill joint venture to produce another type of environmentally friendly plastic. Dow had just given its share back to Cargill, taking an estimated loss of $750 million on the transaction.

The economic challenges faced by green plastics have stumped many companies. In the last twenty years, there have been at least two prior starters in the category: Monsanto, with a product called Biopol, and Warner-Lambert, with a product called Novon. Both of these companies bet and lost big on microbial produced plastics.

Dr Berke points out that green plastics predate the petroleum-based kind. Some of the earliest kinds of plastics, like celluloid and cellophane, for example, were derived from cotton and wood.

According to Berke, the problem with green plastics is less the technology itself and more the ways that plastic fits into existing systems of waste disposal.

He told me:

“Municipalities have a variety of options for processing their trash. Landfills are regulated by local, state and federal authorities to ensure that there can be no leakage from landfill contents that could potentially contaminate groundwater. That means that buried trash is effectively mummified due to the absence of water. This poses a major barrier for biodegradeable plastics, since they must have moisture to decompose. A century from now, those biodegradable plastics will not have degraded – they’ll be preserved in their existing form. So the technology can’t deliver its major benefits, due to the necessary requirements of our municipal waste disposal systems.

“Now consider the upstream effects – the energy-intensive systems required to grow, extract and process the microbial or plant materials into final product. Bioprocessing – converting organic material to plastic — is not cheap. Even farming, of course, consumes oil in its own right. It remains unclear that the net fossil fuel use from biodegradable plastics is lower than would be the case by converting the petroleum directly to plastic cups.

“Finally, the current solutions for plastic waste disposal are not so unsatisfactory as to demand a radical technology shift in raw materials. Currently, most cities mandate that haulers recycle collected plastic waste – plastics are separated from the waste stream and converted for reuse in new articles such as plastic lumber and fill fiber. What is not recycled is usually incinerated, frequently with co-generation to produce electricity. Think of the plastic as petroleum that was temporarily diverted into use as packaging on the way to being burned for electricity.”

As for Metabolix, he predicts that the stock price of the company will correlate with prices of oil futures, and that the IPO was timed with a peak. “Premium price without premium performance is a hard sell,” says Dr Berke.

Let me suggest a slightly different scenario, building on the increasing momentum of the sustainability trend. As I’ve talked to innovators and written about innovation trends, I’ve come to think of them like waves, and the companies, like Metabolix, like surfers. Many of the surfers, like Dow and Cargill, are too early – they wait for the wave, and after several years, they begin to believe that it may never come. Some of these companies decide to get out of the water – they write off their investments and move on.

A few companies are lucky enough (or patient enough) to be there when the wave finally does come. DuPont, for example, has been investing in a variety of sustainability initiatives for over a decade. Vik Prabhu, a business development manager from DuPont, was one of the DuPont executives who worked on a few of these projects. He noted:

“It was very tough. Because the market has been very slow to adopt green technology. And green alone, we found out the hard way, is not sufficient to sell a product.”

Vik Prabhu, New Business Development Manager, DuPont

After years of investing and waiting for the wave, DuPont is now emerging as one of the leaders in sustainability. In fact, the company recently said it expects to derive additional revenue of $6 billion by 2015 as a result of its sustainability efforts.

Perhaps Metabolix is positioned in the right place at the right time, with a technology that is getting ready to pay off after more than 20 years and hundreds of millions of dollars of investment. Dr Berke doesn’t think so. But, evidently, many other investors do.

More information:

1. Metabolix home page is here.

1. Carl Berke is available here.

1. My update on the Cargill/Dow joint venture is here.

1. DuPont’s press release on sustainability is here.

1. I wrote a piece on trends that will be forthcoming in the May 2007 issue of the journal Research Technology Management. When it’s published, it will be available here.

What does Claude Monet, the idiosyncratic French Impressionist painter, have in common with McDonald’s, the fast-food restaurant? At a mature age, both went through a radiMonetcal re-interpretation of their “operations” in order to re-emerge with a new, successful approach.

Detail from Monet’s Water lilies

In 1910, when French painter Claude Monet was 80 years old and much revered by the art world, he was commissioned by the French Prime Minister Clemenceau to paint a series of his “Water Lilies” for the French nation.

By this point in his career, Monet was a master of his technique. Yet, as he undertook the commission, he found himself disappointed with what he was painting on his huge canvases. He was simply repeating what he had already mastered, and his integrity would not allow him to do what he had always done. Now, nearly infirm and with failing eyesight, Monet realized he had to begin anew, to set out in the direction of what he did not know, rather than simply trying to repeat himself–and thereby becoming obsolete in his own eyes.

Monet undertook a radical reinterpretation of his own beloved water lilies. He increased his color range. He shifted his perspective. He brought the viewer closer to the subject he was painting so that the viewer now felt as though he was actually wading through the lily pond itself.

Monet, even at an advanced age, insisted upon reinventing his art and himself. He understood that just as the world would not stand still, neither should he. The result of his self-reinvention? Innovative paintings that continue to excite and inspire all who see them.

These kinds of shifts and reinventions don’t just happen in the art world. In 2003, McDonalds reported the first ever quarterly loss in its 52 year history. A change in CEOs brought in James Skinner who shifted the corporate strategy from one based on external growth through acquisition and increased numbers of stores to internal growth based on increasing same store revenues. The result of its self-reinvention? A reinvigorated McDonalds, with revenues shooting up 40% between 2002 and 2004.

In essence, McDonald CEO Skinner pulled a Monet. He shifted perspective. He demonstrated that a mature business, like a mature artist, can reinvent itself. Both the artist and the CEO used the creative approach of changing perspective.

Monet’s story is one example of a consistent pattern — great artists use their creative skills to consistently reinvent their art. Over the last 6 years, my colleague Kathleen Jordan, Ph.D., and I have been studying the approaches taken by more than 20 great artists, from da Vinci to de Kooning and Diebenkorn, regarding how they became great, and how they remained great over a long span of time.

From this study, we’ve been able to delineate seven core creative competencies. We believe that these kinds of creative skills are systematic and vital in any innovative activity. The seven core creative competencies are:

1. Preparation: Deliberately engaging in activities which predispose us to creative insight;

2. Seeing: The ability to observe without preconceived ideas;

3. Leveraging Context: Taking advantage of one’s understanding of the strategic and social environments in which one works and lives;

4. Embracing Ambiguity: Acting on opportunities presented by change and uncertainty;

5. Risk Taking: Taking action without certainty of outcome;

6. Discipline: Acting consistently whether or not one feels motivated;

7. Collaboration: Working with others towards a common end.

These core creative competencies differ from traditional “creativity techniques” often employed during the idea generation phase of an innovation effort. The seven creative competencies support innovation throughout the entire process from idea to execution.

Since these are competencies, that is, behavioral skills, they can be developed and measured. For artists like Picasso, these competencies lifted early talent to brilliance. But for others, such as Matisse and Van Gogh, whose talent was not evident in their early years, working to develop the creative competencies catapulted their efforts to a level of originality and freshness that defined a whole new direction in art.

I don’t have space here to discuss each of these competencies – let me just highlight one of these, collaboration, because what we found in our studies of the great artists may be surprising for those who see these men as solitary geniuses.

Collaboration

“My paintings were never done until Braque said they were done and his were never done unless I told him they were done.”

Pablo Picasso

Collaboration means working with others toward a common end. We are collaborating when we:

· Believe that the outcome of collaboration will be better than what we could accomplish on our own

· Actively seek people with whom to collaborate

· Share ideas and techniques

· Experiment with ideas that come from another

· Build on others’ ideas whether or not we initially agree with them

The popular image of artists such as Picasso and Monet is that they were lone ranger, almost egomaniacal in their individuality, engaged in an isolated, Olympian search for artistic expression. When we actually look at their lives, however, we find that they understood and appreciated the collaborative exchange of ideas with other artists.

Picasso, for instance, worked very closely with George Braque. They claimed they were like mountain climbers, “tethered together” as they ascended the mountain of creative expression. In fact, they are jointly credited with the seminal breakthrough of 20^th Century art—cubism—which set the stage for modern art.

They visited each other’s studios every day. They even made physical changes to each other’s paintings which were gratefully accepted. They worked so closely that it is often difficult to distinguish one artist’s painting from the other’s during this period. Monet also collaborated with his contemporaries, especially Manet and Pissarro. This cross-fertilization led to major breakthroughs for each of these artists. (The left-hand painting is Braque’s Le Portugais, from 1911/12. The right-hand painting is Picasso’s The Accordionist, from 1911).

As in art, so in business. When we peel the onion of how innovation occurs we rarely see it is the result of a lone innovator. Even great innovators like Thomas Edison understood the need for collaborative relationships.

Today, companies are breaking out of the mindset that innovation needs to originate from exclusively inside sources. Organizations as diverse as Procter & Gamble and Netflix are increasingly calling for innovative ideas from outside sources. These collaborative alliances build on the tradition of creative collaboration as modeled by many of the great artists.

More Information:

1. The information about McDonald’s comes from an ICE update of 12 Feb 07. That’s available here.
2. For more on Picasso and Braque, see John Richardson’s book, A Life of Picasso, Volume II, 1907-1917 (Random House, 1996.) That’s available from Amazon here.
3. For more on the seven core creative competencies, go to Hothouse Innovation, here.

Mats Lederhausen, McDonald’s Strategy Chief, Business Week, March 03

The first months of 2003 were the worst period in the entire 52 year history of McDonald’s. In the fourth quarter of 2002, the company reported its first-ever quarterly loss. The company’s stock price hit a low of $12 a share in mid-March of 2003. Its CEO, Jack Greenberg, was fired by the board at the end of 2002. Operations were suffering and franchisees were losing money. At the time, Business Week called it “hamburger hell.”

Four years later, McDonald’s is prospering again. Its sales have grown 40% from the end of 2002 to the end of 2006. The company has quadrupled its dividend over the past five years, and its net income has quadrupled as well, to $3.5 billion in 2006. Its US market share is now three times that of its nearest competitors, Wendy’s and Burger King. This stellar performance has been reflected in its stock, which now trades at around $45.

McDonald’s Monthly Stock Price, Feb 03 – Feb 07

One of the major factors behind McDonald’s resurgence has been a change in the sources of the company’s growth – from external to internal. In 2002, McDonald’s was looking outside of its core business for growth. At the time, the company had invested in a range of other chain restaurants, including Chipotle’s Mexican Grill, Donadio’s Pizza, and Pret a Manger sandwich shops.

But these external investments faced a “move the needle” problem – new ideas and restaurant concepts, even if wildly successful, had little impact on the company’s overall performance.

These new concepts are no longer part of McDonald’s – the company either sold them off or closed them down over the last three years.

“We had lost our focus. We had taken our eyes off the fries.”

McDonald’s CEO James Skinner, in Business Week, Feb 07

Corporate focus has now shifted from growth via new stores to growing sales in existing stores. In 2003, McDonald’s was opening up a new outlet somewhere in the world at the rate of one every 4 ½ hours. This meant that corporate managers spent a lot of their time on real estate – for example, Ralph Alvarez, McDonald’s COO, estimated that he was spending six to seven days of the month on real estate. Now the company is adding less than 100 sites a year in the US. And managers are working hard to improve same-store sales.

McDonald’s is doing this both by improving the quality and consistency of its service and by innovating within all aspects of its operations. Consider the range of change:

Ø The company is pushing its franchisees to stay open 24 hours. Currently, nearly 40% of McDonald’s restaurants are open 24 hours, up from .5% in 2002;

Ø Many kitchens are being modified with a portable electric unit that will permit restaurants to serve breakfast all day long. Imagine Egg McMuffins available 24 hours a day;

Ø The product development process has been systematized and disciplined, so that new concepts are tested both for their attractiveness to customers and for their profitability and ease of preparation. It’s hard to believe, but this wasn’t standard operating procedure before 2003, when McDonald’s new product introductions were much more haphazard.

The new corporate focus on increasing same-store sales benefits McDonald’s franchisees directly. This was not true for the previous geographic expansion approach, in which new restaurants took sales away from existing franchises.

“We’ve learned. We’ve evolved. We believe we’ve cracked the code in the United States.”

McDonald’s CEO James Skinner, in Business Week, Feb 07

The McDonald’s renaissance came from a change in strategy – the company stopped adding restaurants in the US and turned instead to increasing sales at existing outlets. This led to new products, new layouts, and new approaches. While it may be true that the mass market is dying, the new 24-hour McDonald’s restaurants have been designed to serve a large number of the newly hatched market segments.

This change in strategy didn’t come easily, though.

It often seems like big companies need to have near-death experiences before they evolve and learn to do something different. The past twenty years have provided a large number of well-publicized examples of companies that had big stumbles, only to rebound. Think of IBM and Hewlett Packard.

Once companies declare that they’ve “cracked the code,” however, they are setting themselves up for a string of unpleasant surprises. In many industries, the code for success keeps changing, and companies like McDonald’s prosper when they can bring themselves to change along with it.

More Information:

1. Business Week reported on McDonald’s “Hamburger Hell” in March of 2003. Here’s a link to that article.

2. Here’s a link to the recent Business Week cover story on McDonald’s in its 5 February 2007 issue.

3. Back in June of 2003, I wrote a piece for Cap Gemini’s Focus e-zine entitled “How would you fix McDonald’s?” That’s reprinted here.

4. McDonald’s new strategy may have benefited from the insights of author Chris Zook, who wrote Profit from the Core in 2001. That’s available from Amazon here.

David Burrage, Motorola research portfolio and processes manager, in Business Week, 28 April 2006

How does your organization measure its innovation performance?

Based on research we’ve done recently at the ICE Center, there seem to be several common themes and issues around commercializing innovation, applying to both new products and services.

First, innovation effectiveness is an area of perennial concern — senior executives are always interested in assessing their company’s innovation performance. At the same time, however, most companies do not have a systematic or standard way of capturing either investments in, or returns from, innovation. As a result, measurement of innovation performance tends to be ad hoc in most companies, with considerable variation in measures used from year to year.

Because innovation performance is not measured systematically, it doesn’t play a strong role in the performance evaluations of senior management. For example, most senior managers have a growth target for their division or company, and they may be rewarded based on their ability to achieve this target. The mechanisms by which they attain this growth, however, are usually unspecified. Thus, all growth contributes equally, whether it comes from acquisition or from innovation.

At the ICE Center, we’ve been looking at the ways that companies measure innovative activities for several years. We’ve found it useful to distinguish across three categories of measures:

1. Results-based measures, which focus on business outcomes, such as sales or profits, stock price or market valuation;

2. Process measures, which capture the activities that contribute to these business outcomes, such as number of projects in the pipeline, time to market, or percent of sales from new products.

3. Project measures, which look at the returns and investments from specific innovation projects. Measures such as “time to cash” or ROI are calculated on a project-by-project basis;

Each set of measures have their advantages and limitations. Here’s a brief rundown.

Results measures – accounting for growth

Most companies pursue innovation so that they can realize higher growth in sales and profits – they create and launch new products, services, or businesses which can increase revenues or margins. But innovation is just one of many ways to get growth, so simply looking at overall growth rates does not capture innovation’s contribution. For organizations without a strong history of innovation, for example, growth often comes via acquisition or geographical expansion.

Companies could use growth accounting techniques to decompose the sources of a company’s sales or profit growth. Economists have taken this approach in understanding sources of growth for the national or global economy (where they find that innovation plays a major role in contributing to total economic growth). Companies could use a similar approach to decompose a company’s growth into contributions from such factors as innovations, acquisitions, and geographical expansion.

Regardless of the kind of accounting you use, as Motorola’s David Burrage noted above, the results-based measures are lagging indicators of innovation capability – they show the results of a company’s past efforts, but don’t provide good direction on the kinds of activities companies should undertake to get to these results.

Process measures – leading indicators of innovation performance?

Wouldn’t it be great to have a few leading indicators of innovation performance – measures that could tell you how the company will be doing in the future, rather than being a reflection of the past?

Process measures, which look at innovation activities within the organization, may provide some of these leading indicators. Here are a few types of popular process measures:

Ø Number of innovation projects being undertaken;

Ø Average time to market;

Ø Number of patent applications per year;

Ø Percent of sales from new products or services.

The assumption underlying process measurement is that doing the right activities will lead to improved business results. The problem, however, is that it’s difficult to find the right activities to measure as the right leading indicators.

And putting too much emphasis on process measures often leads to counter-productive business results. For example, measuring the percent of sales from new products or services rewards product churning — the substitution of a new product for an older product that may not have needed replacement. The new products substitute for the old, generating expense without adding any revenue. When this happens, new products can actually contribute to reduced profitability.

Project Measures – returns from specific projects.

Project measures are especially prevalent in industries, like pharmaceuticals, where innovative efforts are undertaken in large and discrete projects.

In these situations, there are a number of tools that can provide a measure of project-based innovation performance. In their recent book Payback, BCG consultants Jim Andrew and Hal Sirkin describe the “cash curve” for different kinds of projects. This builds on the “breakeven time” concept first developed by Hewlett Packard in the mid-1980s. In both measures, the idea is to minimize early investment and maximize cash returns.

It sounds simple, but it’s surprising how many major innovations become cash traps. Andrew and Sirkin highlight such products as TiVo, Motorola’s Iridium Satellite Phone, and the Supersonic Concorde as innovations which had a small chance of success from the start because of the high upfront investments required. On the other hand, Apple made a number of decisions in its iPod development that created the conditions for an extremely profitable new product.

Project measures tend to treat each innovation as a separate business, and measure returns on that basis. For most companies, however, innovation projects are embedded into departments that have many other responsibilities as well, like marketing, engineering, or sales. In these situations, it’s both impractical and inaccurate to allocate shared investments between projects.

All three kinds of measures have their advantages and their drawbacks. Many experts recommend using a dashboard or scorecard that contains a combination of results, process, and project measures. The situation for most organizations currently, however, is a much more ad hoc approach to determining the metrics of innovation success.

How do you measure innovation performance? Drop me a line if you’d like to discuss your approach – we’re collecting information for our next Idea-to-Profit Summit in May.

More Information:

1. If you’re interested in the way innovation is measured in economies, rather than companies, Gavin Cameron, of Nuffield College at Oxford University, provided a survey of Innovation and Economic Growth. That’s available here.
2. In December 06, the US Department of Commerce launched an industry/ academy effort to look at the way we measure innovation in the US.
3. Business Week did several articles on company measurement do’s and don’ts. Here’s one of them, from which I took the Motorola quote above.
4. The book Payback by Andrew and Sirkin is available from Amazon here.

On January 16, 2007 (two years late), Netflix announced that its VOD service was finally available.

”This is a big moment for us … I have always envisioned us heading in this direction. In fact, I imagined we already would be there by now.”

Reed Hastings, Netflix CEO, in The New York Times, 16 Jan 07.

Netflix subscribers will be able to choose from about 1000 titles, and the service will stream the movies to personal computers. There will be no additional charge for the service, but the number of hours of VOD movies you can watch will depend on your current service plan – 18 hours per month for most current Netflix subscribers, fewer hours for those with the basic plan.

Netflix’ “Watch Now” Service

Netflix expects to spend an extra $40 million in 2007 on its streaming service, which does not please stock analysts. They are downgrading their ratings on the stock, and its price is down more than 12 percent in January alone.

But Netflix has prospered during a tumultuous time in the business that it pioneered. Over the last three years:

· Netflix has increased its subscriber base from around two million to over 6 million households;

· Wal-Mart entered the business and then withdrew (it now recommends Netflix);

· Blockbuster entered the business, and now has about 2 million subscribers.

Netflix earned about $12 million in net profits in the third quarter of 2006. Blockbuster, on the other hand, lost about $10 million in the same period. Netflix’ market capitalization is $1.5 billion. Blockbuster’s is half that, at $780 million.

Netflix’ current position demonstrates the enduring value of being first. Most analysts and investors expected the company to crumble when brand names like Wal-Mart and Blockbuster both entered the DVD-by-mail business. Netflix stock lost 75 percent of its value during the course of 2004, in expectation that these big names would soon dwarf Netflix in the business that it had created.

That didn’t happen. Instead, the company rebounded and tripled its subscriber base in the period. With this large base, and the recent launch of its “Watch Now” service, Netflix becomes the dominant company in VOD as that technology begins its slow migration to the mainstream. There are other competitors in the business, with names like CinemaNow, MovieFlix, Movielink, and Vongo, but none of them have anywhere close to the reach of Netflix.

VOD, of course, is still in its early days. As is the case with many emerging technologies, its appeal is quite limited. There aren’t many movies to choose from — Netflix offers 70,000 titles on DVD, as opposed to 1000 on VOD. Movie studios release their newest and most popular titles on DVD, so the quality of these 1000 titles is not very high – think “B” movies and some classics like “Amadeus” and “Bridge on the River Kwai.”

And most of Netflix subscribers aren’t all that interested in the service. Few people currently watch movies on their PC – television is the preferred medium. And, because the movies are streamed rather than downloaded, subscribers can only watch movies when they are connected to the internet.

But Netflix’ “Watch Now” service allows it to reposition the threat from VOD, as a technology that undermines DVD-by-mail, into an additional distribution channel for the company. And the VOD business should have even lower operating costs than DVD-by-mail — there are no people or postal services involved in delivering movies on the internet.

Blockbuster is innovating too, but it’s going in the other direction. The company launched its “Total Access” program in the fourth quarter of 2006. This allows DVD-by-mail customers to exchange their DVDs at Blockbuster stores rather than mail them in. Blockbuster is integrating its 8500 rental stores as another distribution channel for its subscription business.

“Total Access” is a wonderful program for subscribers, since it gives them immediate access to movies at the store for no charge. Since launching the program with an aggressive marketing and couponing campaign on 1 November, the company has been able to increase its subscriber base by almost 50 percent — from 1.5 million on 30 Sep 06 to 2.2 million by 1 Jan 07. Its stock price has also gone up more than 30% over this period.

As Harvard Professor Clayton Christensen has noted, disruptive technologies are usually developed by new entrants. Netflix’ “Watch Now” service demonstrates a phenomenon that has historically been quite rare in commercializing innovation – a dominant company introducing technology that undermines its existing business model.

“Investors are rightfully scared of single-model companies.”

Netflix CEO Reed Hastings, in The New York Times, 16 Jan 07

Blockbuster is trying to make the best use of the fixed assets and established procedures that it has, which is the more common response of established firms to new technologies. It’s hard to see, though, how Blockbuster’s service can profitably compete with the very low distribution costs of video-on-demand.

More information:

1. The New York Times’ story on Netflix’ new VOD service, published on 16 Jan 07, is here.
2. Blockbuster 3q earnings report, with a description of its total access program, is here.
3. On Saturday, 20 Jan 07, The New York Times published an interview with Blockbuster CEO John F. Antioco. That’s here.
4. I wrote a couple of previous updates on Netflix in 2004. One, on Netflix and VOD, is here. Another, on the competitive dynamics in the industry, is here.

General Motors Spokesman Dave Barthmuss on the EV-1 in The New York Times, 29 Sep 05

Just 15 months after Mr Barthmuss explained why GM’s EV-1 electric vehicle had no place in the company’s future, GM is back with a mass production electric vehicle, the Chevy Volt.

Bob Lutz introducing the Volt at Detroit Auto Show, Jan 07

The Volt will be powered by GM’s “E-flex” design, which the company plans to incorporate not just into the Volt but also into additional models to be produced by Saturn and GMC.

The only problem, and it’s a significant one, is that the battery technology is not ready yet. GM has a vehicle design but lacks the technology to power it.

The company’s suppliers are working on it, however. GM has contracted with a range of smaller companies, with names like A123 Systems and Energy Conversion Devices, to deliver a lithium ion battery that can run one of its electric vehicles for forty miles before requiring a charge.

Back in October 2005, Ed Tuttle predicted the rise of these kind of “plug-in” hybrids. Ed is a Managing Principal at Analysis Group and follows the electric vehicle industry closely. I recently asked him what he thought of the Volt, and he noted:

“I am pretty excited about the Volt. My main reason is the architecture – it’s a modular serial hybrid, meaning that the ICE [internal combustion engine] can work at optimal efficiency as a generator, the e-drive can be “pure,” and the ICE unit can be replaced in later applications with a diesel, a fuel cell or anything else that can generate the electricity.

“E-drive with a modular generator is much more the future than parallel hybrids where all the ICE drive apparatus (transmission, etc) is still in place along with the e-drive. So I like the fact that GM is working with a hybrid that feels like it has a future rather than parallel hybrids, which just feel like the final evolution of the traditional ICE architecture….

“My fear for GM would be that they get to market first but make some poor specification decisions and/or fail to adapt and improve fast enough and find that later adopters of the architecture eat their lunch.”

Ed Tuttle email 11 Jan 07

Personally, I would like the Volt to succeed. GM’s announcement is audacious and points to a desire for big innovations from a company that has been lacking them for a long time.

Still, I wouldn’t buy GM stock on the promise of the Volt or the E-drive system. The Volt tries to “schedule invention” by anticipating breakthroughs in battery technology, and this is a classic pitfall in product development. When the invention arrives, it often comes with a different form or in a different timeframe than managers had anticipated.

GM acknowledges this unusual deficiency – it can’t say when the Volt will be produced, or even give a sense of how much it will cost. The company can, however, demonstrate its commitment to this radically new vehicle platform. After all, it’s still the largest auto manufacturer in the world (although it will probably lose that title to Toyota in 2007).

And this kind of public commitment from large automakers is vital in creating widespread acceptance of electric vehicles. As Felix Kramer, who founded the non-profit group CalCars, told The New York Times:

“We commend GM for being the first out of the starting gate in the great plug-in car race of 2007”

Felix Kramer in The New York Times, 7 Jan 07

More Information:

1. This is the third part of a series on innovation and electric vehicles. The first part looked at lead users in California. The second part looked at electric vehicles “crossing the chasm.”
2. Here’s a link to a page that contains a video of Rick Wagoner of GM introducing the Chevy Volt.
3. Recent reporting on the Volt comes from a 7 Jan 07 story in The New York Times. That’s available here.
4. My December 05 update on General Motors and its brushes with innovation is here.
5. Ed Tuttle is a Managing Principal at Analysis Group, Inc. Their website is here.