The Next Big Thing?
The idea of an environmentally
friendly electric car has been
around for almost 100 years.
Multiple product and technology
innovations have steadily advanced
this industry but so far have failed
to create wide-scale adoption.
WHAT ARE THE RISKS FOR SOMEONE WHO
DECIDES TO USE AN ELECTRIC CAR?
The risk of running out of
electricity in the middle
of a trip. Current batteries
last for only about 100 miles,
and recharging them takes
The asset risk associated with
owning a battery. The battery
is very expensive, and tech-
nology evolves quickly, so the
owner has to maximize battery
use despite being unable to
drive long distances.
The data MyFab gets through customer
polling reduce its exposure to stock-outs
and excess inventory.
furniture quickly has been greatly refined, so relocating doesn’t make as much competitive difference
as it used to. The data MyFab gets through customer
polling enable it to predict customer taste and demand levels more accurately than its competitors
can, reducing its exposure to stock-outs and excess
Even when companies can reduce risk using the
classic approaches, they should consider upgrading
their information-gathering capabilities, because
speeding up production or rewriting contracts often
creates a new risk. This was a potential problem for
LiveOps. Because its employees work from home
and are independent contractors, it is much harder
to verify that they are appropriately trained to answer calls. LiveOps mitigates this information risk
by monitoring agents’ performance and routing calls
first to the higher-ranked agents.
Many people regard risk only as something to eliminate—an undesirable concomitant of managing the
resources and capabilities needed to deliver a product or service. But as the economist Robert Merton
has often pointed out, one can also argue that companies create value by being better at managing risk
than their competitors are. The implication is that if
you are better than others at managing a particular
risk, you should take on more of that risk.
The history of innovation demonstrates that
quite a few companies have made money by taking
on more risk—typically by changing the terms of
their contracts with suppliers or customers. More
than 30 years ago Rolls-Royce, a manufacturer of
aircraft engines, identified a major pain point in the
industry: Maintaining airplane engines is rife with
risk for the airlines. Engine breakdown can ground a
plane for weeks while the airline pays for repair time
and materials. Airlines, especially small ones, don’t
always have the resources to adequately provide for
So, in the 1970s, Rolls-Royce started offering the
airlines a very different service contract: “Power by
the hour.” The airlines would pay Rolls-Royce for
an engine’s flight hours rather than for repair time
and materials. Of course, much of the risk reduction
the airlines obtained was reflected in the price, but
transferring the risk had a more profound effect:
Rolls-Royce was motivated to improve its products
and maintenance processes, because the fewer the
problems and the quicker the fixes, the more the
manufacturer got paid. The airlines could never
have created value in this way, either on their own
or by prodding Rolls-Royce, so the new contract
triggered a completely new value creation dynamic.
This movement, which is often referred to as ser-vicization, has spilled over to other industries. For
example, the German rail vehicle manufacturer
Bombardier charges its customers for maintenance
according to miles driven, and Caterpillar charges
construction companies according to the amount of
Sometimes trying to avoid a risk actually increases it, and you can better manage it by being willing to own more of it. Take the car rental business.
The risk in this industry lies in underutilizing fixed
assets—cars. Traditional companies rent in daily increments, so the customer has to pay for a day even