Noted management consultant Peter Drucker once wrote that "an established company, which, in an age demanding innovation, is not able to innovate, is doomed to decline and extinction." Some say electric utilities were the inspiration for Drucker's comment. Because its main product is a both a service and a commodity, the electric power industry doesn't value innovation as highly as, say, the communications or computer software industries, where billion-dollar bets on the success of a new product are routine. Most of today's top utility executives were attracted to the business by its stability and predictability—not because they were looking for a chance to compete at the retail level.
Regulation discourages utilities from nurturing or promoting innovation. For those that tried to buy their way into growth industries a decade ago, the results were not always what they expected. Diversification doesn't always lead to success, and many utilities were bloodied while trying to compete in businesses for which they were inadequately trained and equipped. Today, the pendulum has swung back to the other side, and "back to basics"—improve reliability, reduce costs, and improve customer service—has become more than one utility's corporate mantra. It's tough being entrepreneurial when technical accomplishments are focused on cost savings rather than R&D and new products.
There are exceptions to every rule, however, and those exceptions are what make for interesting case studies—like this one. In June, the Edison Electric Institute selected Xcel Energy as one of two recipients of its 2006 Edison Award in recognition of the company's "commitment to cutting-edge technological innovation." The award is highly coveted by utility executives, and the competition each year is stiff. The final selection is made by a team of former C-level utility executives who have the unenviable task of finding the best among the many deserving nominees.
Path to profits
Wall Street is looking for key differentiators among what must appear to be many similar vertical businesses operating in the electric utility sector. Growth in earnings per share will continue to rule, but growth can't be achieved simply by cutting operating costs. Some utilities are looking to grow through mergers and acquisitions. Others attempt to build a high-performing organization from within, by weaving technology into the fabric of the corporation and by creating a culture that values continuous improvement.
Which approach will generate the bigger return on each shareholder investment dollar remains to be seen. But my bet is on companies that build a firm foundation for future growth by investing in their technology and organizational infrastructures.
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