Question

Face the Future

Times don’t seem to be much better in the oil business. Sure, there have been some bumps in the road the past few years—the tragic oil spill in the Gulf of Mexico and unstable prices and supply due to political situations. But there’s one piece of news that makes all those obstacles easier to deal with—profits are up and not just a little bit either. Profits are positively soaring. Exxon announced that its earnings for the most recent quarter were up by 69 percent ($10.65 billion) when compared to the previous year’s earnings. Royal Dutch Shell posted an increase of 30 percent ($6.29 billion), even while experiencing a 2.5 percent decrease in production, and Occidental Petroleum’s earnings jumped by 46 percent ($1.55 billion).

Times certainly seem to be great, but there are many executives in your company who are pushing for big changes. Sure, they argue, revenues and earnings and profits are sky-high right now. But what about the future? Consumers and governments around the world are becoming more concerned about oil—how it impacts the environment and whether there will be enough oil to meet fuel demands. In response to these concerns, there has been much research and development dedicated to alternative fuel vehicles, from all-electric cars like the Nissan Leaf, to gas-electric hybrids like the Chevy Volt or hydrogen-powered cars like the Honda FCX Clarity. Consumers have responded quite favorably to such technologies. In just four short months, GM sold over 2,000 Volts and Nissan sold over 1,000 Leafs. What’s even more encouraging is the sign that nearly 20,000 customers have already paid a deposit to be put on a waiting list for the Leaf, and almost 54,000 are on the Volt waiting list.

The executives pushing for change point to these figures as a sign that the auto industry will soon experience a dramatic shift. They’re arguing that the age of the gasoline engine (along with gas stations and gas companies) will soon be over, replaced by a more environmentally friendly method of fueling cars. In their view, the company should act now, and quickly, to take advantage of this shift by investing in a nation-wide network of electric charging stations, where consumers recharge their all-electric or plug-in hybrid cars. That way, when gas-engine technology is eventually surpassed, your company will be in prime position to provide recharging infrastructure to the entire country.

There are others in the company, however, who doubt that this is the right step to take. Although they recognize that gas engines may not last forever, they’re not convinced that it’s a technology in decline. They recognize as well that sales of electric cars and hybrids are on the rise, but these are still microscopic compared to the 11.5 million conventional cars sold in the United States or the 18 million sold in China last year. They are also concerned that all-electric cars are just one choice among many alternative fuels; there are also hydrogen-powered cars, natural gas-powered cars, biofuels, and who knows what else will be developed in the future. Their great worry is that the company will spend huge amounts of time and money to develop a recharging network only to have another alternative fuel rise as the dominant design.

So what should the company do? Should it look at the future right now, even as its earnings from oil are near record highs? Or should it stay the course?

Questions

1. What is your recommendation for how the company should proceed? Should it take action on developing an alternative fuel network or wait until a dominant design arises?

2. What are the advantages and disadvantages of choosing a technology format before a dominant design arises?

3. What steps could the company take to help ensure that electric engines become the dominant design?

Answer 1

Answer to Question 1)

With environmental concerns rising, companies are realizing that in the near future, automotive sector would surely require a rapid revamp. One of the major reasons for this is the fact that oil use cannot continue forever we require alternative means to fill in the demand of people.

My recommendation for the company would be to fully engage in the process of developing an alternative fuel network for electric vehicles.

One of the major reasons is that demand is slowly and gradually catching up and as that happens it would be easier to produce the vehicle, even at a lower cost and be able to earn sufficient profits.

Electric vehicles may not be a dominant design strategy today, but yet it is futuristic and the average cost of running an e-vehicle is lower in comparison.

Further charging stations would offer extra revenue sources in which the company can earn from not only the sales of the car itself but rather from that of fuel also.

Therefore, considering the shift in demand and the fact that the company may be able to achieve the first movers’ advantage through which it may be possible for it to earn more money I would recommend to invest in the new technology.

Answer to Question 2)

When companies develop a new technology format, they improvise and are able to gain from the first movers’ advantage. When we are new in the industry our profit margins can be relatively higher. This is because the demand is not divided in the market and there are only a few other players from which the product can be purchased.

If you happen to receive a patent on the new technology developed, it is even better. Developing new technology and getting it patented helps people in being able to earn big for themselves. A patent gives the company the exclusive right to sell the product and when that happens you reap in key benefits from the development of technology.

Further, it is to be remembered that the disadvantage of investing early is that if the design is flawed and if the general public do not accept it, it could cause huge losses for a firm.

Any new design is subject to public scrutiny. If it has not been implemented earlier, we cannot assess if it would be a market failure or success.

3)

The key thing to do to ensure that dominant design is achieved in case of electric engines is to increase the range of vehicle. Range refers to the number of miles the car can run on a single charge. The biggest existing problem with electric vehicles at this point is the fact, that on a highway people do not find the car safe in case of discharge. It is not possible to travel long distances.

Furthermore, creating a robust network of electric stations where you can charge your vehicle is extremely important. This would ensure that people do not depend too much on electricity at their homes to power the vehicle itself.

Last but not the least, the pricing of the vehicles must become affordable enough for people to purchase the vehicle. If you charge a premium on these vehicles up and over petrol and diesel ones then the product would find it tough to find many buyers but rather enthusiasts would be the only people wanting to purchase the vehicle.

To ensure that electric engines become a dominant design therefore, the above listed options should be implemented respectively.

Please feel free to ask your doubts in the comments section if any.