How a company quit its core business to grow in a new space
Original Publish Date: June 22, 2021
“…that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire” – Malcolm Gladwell, The Tipping Point
Every company comes across tipping points that dictate its place in business history forever.
A reasonable mix of paranoia and smart risks are the prerequisites to survive. Still, many companies favor inaction over the ‘bold choice’ to act.
A Danish company offers a timely case study on breaking away from corporate inertia, while also pausing us to self-reflect on our actions or lack thereof.
ØRSTED’S TIPPING POINTS
A quick rundown of the company’s background…
Ørsted started as Dansk Naturgas A/S (a Danish state-owned company) back in 1972 to develop oil and gas resources in the Danish sector of the North Sea. Over the decades, the company built up its North Sea oil and gas portfolio and was renamed DONG (Danish Oil and Natural Gas) Energy. DONG also moved into electricity gradually gaining exposure to coal-fired power plants. In its current iteration, Ørsted (name change in 2017), “develops, constructs, and operates offshore and onshore wind farms, solar farms, energy storage facilities, and bioenergy plants, and provides energy products to its customers”.
As my over-simplified timeline shows above, Ørsted is far from its oil and gas roots right now and ranks as the world’s most sustainable energy company. Harvard Business Review, in 2019, ranked Ørsted as one of the top 20 business transformations of the last decade behind Netflix, Adobe, Amazon, Tencent, and Microsoft.
The journey for Ørsted to get to its current form is the result of a cumulative set of decisions when the company was backed into a corner. The company had to make a transition by name and by business given the following circumstances staring at its face.
DONG was emitting nearly one-third of Denmark’s CO2 emissions
Ailing gas and coal power plants including dwindling oil and gas production from North Sea fields
Increasing focus of society on climate change
A steep drop in US gas prices impacting the company’s gas business
The threat of increasing carbon taxes and similar carbon curbing EU policy goals
Falling offshore wind costs – cheaper to build and operate offshore wind farms vs. coal, gas, or nuclear
And that’s not an exhaustive list once you consider internal company dynamics!
ØRSTED’S CHOICES IN RESPONSE TO THE TIPPING POINTS
"Many energy companies say they plan to transition away from fossil fuels to renewable energy sources; Ørsted is often held up as an example of a company actually doing it." – 2021 TIME100 Most Influential Companies
See the world in a new way
“Love your home is a tagline that works for employees and consumers, while Let’s create a world that runs entirely on green energy is a long-term mission that speaks to both consumers and investors” – Building a Sustainable Brand: The Ørsted Story
Any rebrand in the energy space comes with accusations of greenwashing. Sometimes nothing’s better than a conscious 360-degree branding effort to reintroduce yourself to the marketplace and highlight your new mission/view of the world. The official name change to Ørsted to celebrate a Danish icon and the strong messaging effort did a great job communicating the strategic transformation away from the upstream oil and gas business.
Add concrete details to an aggressive vision
Even going back as far as 2009, DONG formulated an 85/15 vision to flip the ratio of 85% black/15% green power and heat production to 85% green/15% black within a generation! Ørsted wouldn’t exist in its current iteration without this aggressive vision. The ex-CEO also set a long-term goal for the company to become the world’s first “green energy superpower”. Ørsted’s current targets for 2025 (be the first carbon-neutral utility) and 2040 (eliminate emissions in the supply chain) are a testament that it’s not slowing down anytime soon.
Acquire and divest smartly
Ørsted’s understanding of NIMBY issues, wind speeds, load factors made it favor offshore wind right from the get-go. A series of small Danish utility acquisitions gave the company the initial exposure to offshore wind. Similarly, acquisitions like Deepwater Wind gave it access to the American market while specific partnerships opened the Asian market for the company. On the divestment side, Ørsted went on a spree to offload non-core assets culminating with the sale of its oil and gas business to INEOS in 2017.
Close the gaps to succeed in the new space
“We discussed what our future growth areas should be: areas where we had critical mass, where we had the right competencies, and where we could differentiate ourselves. It became clear that one was wind power.” – Martin Neubert, Chief Commercial Officer
Winning in an early-stage market takes guts to connect the dots which only make sense in retrospect. Ørsted set itself an ambitious cost target to bring down the ‘levelized cost of electricity’ from offshore wind which was also embraced by the industry and crucial for countries like Denmark, Germany, UK to plan their subsidies and build-out targets for. In the same vein, an early acquisition closed the installation gap since offshore wind installers were facing bankruptcy risk. Multiple partnerships like the one with Siemens resolved the problem of achieving scale around crucial pieces like turbines, cables, installation vessels.
Make the lessons from every new project count
“Data from 1,150 turbines across Europe help further optimize operations and allow the firm to design new projects more efficiently” – Peter Bisztyga, Bank of America
Ørsted’s initial foray into offshore wind started in Britain by taking advantage of their subsidies. Like in any market, the companies gradually competing in the auction process moved the needle toward cost-consciousness. The laser focus on wind helped Ørsted to scrutinize costs and quickly move to incorporate operational changes like the move to bigger turbines, relying on specialty vessels for installations and maintenance, etc.
Time the transition (as much as possible)
“Ørsted now has the wind at its back. With climate change rising up the political agenda, and investors increasingly seeking less polluting options, the company responsible for installing a third of all offshore wind turbines has become a magnet for fund managers.” – Financial Times
This is easier said than done. And there’s never a perfect time for a transition. Given all that, Ørsted was able to build on the green push, building momentum around green investments by offering a much desirable case for investment post-transition.
Be open to adjacencies
Intermittency is a classic problem with wind and solar technologies. Considering its focus on offshore wind, Ørsted continues to take prudent steps to explore new business opportunities in energy storage to tackle intermittency. It’s re-entering the onshore wind space and expanding its exposure to solar PV. Building on the long-term mission around green energy, Ørsted is also increasing its waste-to-energy and biomass capacity which will help the company exit coal power plants by 2023. Finally, the company’s efforts to explore alternate business models (Energy-as-a-Service) helps it complete the bridge between green energy generation and demand centers (ex: commercial and industrial customers).
Stand by core convictions
"They pushed ahead with their plan without getting a second opinion from outside consultants" – A tale of transformation, Eric Reguly
Maybe being a 100% state-owned company at one point in the past drove certain Ørsted’s sensibilities. Hard to quantify everything including the drive of a company to show its native country’s efforts in a positive light. Ørsted was chasing a world where it wasn’t responsible for a substantial part of Denmark’s emissions while also being a vital partner in the country’s green push.
TAKE A MOMENT TO SELF-REFLECT ON BEHALF OF YOUR COMPANY
What are the tipping points facing your company right now?
Are there any tipping points that will force your company away from its core business?
How near or far are these tipping points? Are they predictable or unpredictable?
Does your company have active initiatives to address them?
Can you outline the version of your company in existence 10 years from now?
Additional articles to explore this topic further
[1] How to fight corporate inertia and continue to grow
[2] The mission vs. vision confusion and why it matters
[3] Finding the right time to reinvent your business
[4] Selling your company strategy on shifting business trends
[5] 3 questions to remove your blind spots while chasing adjacent markets