The challenge of innovating in brownfield versus greenfield markets

Across the globe, many of the opportunities for sustainable innovation will be in mature markets like energy, transportation, agriculture, construction and will present very different challenges from those of innovating in information technology, Internet applicaitons, or social media. The differences between driving change in these different conditions is a defining characteristic of each—something that entrepreneurs, investors, and policy makers alike seem to forget.

(this post is part of a series attempting to recognize the unique challenges ofsustainable innovation)

The terms ‘brownfield’ and ‘greenfield’ originated to describe the difficulties of modernizing existing factories relative to building new ones. Because brownfield factories were originally designed for particular modes of production, once major changes were needed, it was often easier to just find a green field and build a whole new factory than try to upgrade an old one.

The same challenges apply to developing new products and services for different markets and industries. Brownfield markets are often large and have, over time, established practices and technologies, incumbent customers and competitors, supporting and specialized infrastructure, deep-rooted business relationships, and extensive government regulation. Greenfield markets are, by comparison, young, typically small, and have few established practices and technologies, little-to-no specialized infrastructure, newly arriving customers and competitors, fluid and emerging business relationships, and relatively little government oversight.

In fact, many of our current models for innovative companies—Microsoft, Amazon, Google, Facebook, and Apple—all enjoyed their best growth years in step with growing, greenfield markets. So too did Ford and General Motors in their early days. In a greenfield market, it's not so bad to have a 20 year-old, hoodie-wearing, socially-inept programmer setting your company's innovation strategy. Not so much in brownfields, where existing business relationships often spell the difference between success and failure. But this is one of the lesser aspects of the challenge of innovating in brownfields.

By definition, sustainable innovation are addressing the problems of mature markets, whose scale and dependency on outmoded practices have proven unsustainable. Like the old adage in pharmacology, the dose is the poison. Most drugs are ineffective at a low dose and toxic at high dose—they depend on the size of the window in between those upper and lower bounds to be effective. The same holds for technologies—in small doses most technologies are sustainable. Only when they become large and intensively-used do their outputs become toxic (or at least unsustainable).

The incumbent energy, agriculture, transportation and construction industries, for example, have reached such proportions. They are brownfields: large, well-established, deeply entrenched, and highly subsidized. John Dillinger was asked why he kept robbing banks and his answer, "because that's where the money is," is the same reason that sustainable innovation is primarily defined by the challenge of innovating in brownfields.

There are three aspects to the challenge of innovating in brownfield markets. First is the nature of the entrenched technical infrastructure (sometimes literally) that supports the incumbent systems and, as a result, resists change. The capital assets of energy suppliers, such as power plants, have an average life of over 40 years. The demand-side systems are equally complex—transportation, appliances, buildings (industrial, commercial and residential), and industrial equipment—and equally integrated with this existing supply system. In developed economies, these systems have been in place for over a century and are tightly coupled to and highly regulated by local, state and federal agencies. Considerable profit, power, status, and status quo reside within the perpetuation of the existing network of relationships—something I'll touch on next.

Entrenched technologies pose different challenges for companies innovating in brownfield markets. New products and processes, designed for mature, established markets, often must be hobbled in terms of their overall potential in order to fit within the complementary systems that make up the rest of the infrastructure. Take the Acela, the U.S.'s first attempt at high speed rail. By the time the rolling stock (the locomotive and passenger cars) were retro-fitted to run at high speeds on our marginal rail stock, they weighed too much to go that fast. Capturing the best wind requires building new transmission lines at a cost that fatally burdens any new projects. By contrast, innovations introduced at the initial periods of wholly new markets, like the semiconductor, personal computer, and Internet, could establish themselves as the cornerstones of emerging systems that would then grow up around them.

Bringing sustainable innovations to developing countries and industries, in some cases, provides similar opportunities to introduce new technologies and practices, and enable new market structures, and new regulations, to emerge and co-evolve together. For example, China represents a significant greenfield opportunity for low-carbon innovation. While the country has established energy prices based on low-cost coal-fired plants, rapid infrastructure development is enabling the emergence of low-carbon technologies that are unencumbered by established infrastructure. At the same time, this development presents a market of unprecedented scale. In the 1990’s, China was able to leapfrog the construction of traditional copper wire telephone network, moving directly to cellular communications in the 1990s and they are now pursuing the same opportunities in rail and energy infrastructure, embracing high-speed rail, and nuclear and solar power. Companies able to pursue low-carbon innovation opportunities in this market face both the benefits and risks of bringing new technologies to scale rapidly, where disparate elements of the infrastructure must emerge simultaneously.

A second aspect of brownfield markets are the entrenched economics that shape the costs and benefits—the business proposition (whether a company can make money) and value proposition (whether a customer actually benefits) of emerging technologies. The business proposition for new technologies is often hindered by direct and indirect subsidies for incumbent competitors. Direct subsidies come in the form of land grants, tax breaks, subsidies, and favorable regulations. For example, energy efficiency innovations often depend on energy policies and pricing. The benefits to adopting, for example, new energy-efficient electric home appliances, computers, HVAC systems, or industrial motors can be undermined in countries where electricity is ubiquitous and low-cost.

Indirect subsidies come in the form of existing social, economic, and political support for current companies and technologies, including a trained labor force, local community support, institutional and regulatory sanctions, and monopoly grants. Sinilarly, entrenched physical assets can and are often used well beyond their amortization—thus providing incumbent competitors with extremely favorable economic terms. The countries that adopted rail travel in the early 1800s reflected, in many ways, those that did not already have well-established regional or national transportation systems (roads and canals). In France and Holland, for example, the initial economic advantages of rail travel were dampened, and the costs of constructing bridges and crossings relatively increased, because canals were already in widespread use. This reduced rail’s initial advantages against low-cost shipping and slowed its adoption. Today, high-speed rail faces similar challenges, where highway systems and short-hop air travel present competitive alternatives to incumbent airlines in developed countries.

The third aspect of brownfield markets are the entrenched political interests that actively (and passively) resist change. Innovations can be slowed, if not outright prohibited, by regulations; and it often faces active resistance from entrenched competitors and others who would benefit by perpetuating the status quo. In Richard Lester's 2009 report, “America’s Energy Innovation Problem (and How to Fix It)," he notes

“history is replete with examples of failed or aborted commercial demonstration projects, of interest-group politics and interregional conflicts delaying and constraining Congressional action, of political accommodations to the loudest voices in the energy innovation debate, and of a sometimes-dysfunctional government bureaucracy pushing particular projects, technologies, and subsidies long after their unsuitability has become obvious. A related problem concerns the overlapping jurisdictions of federal and state governments. State regulatory authority is pervasive, especially in the electric power industry, and the complex and fragmented structure of both the industry itself and the states’ regulation of it has frequently been a hindrance to energy innovation.” (2009: 13)

This is not new. In the 1880's, Edison was forced to compromise his electric lighting technology to integrate it effectively within the existing market and regulatory environments of the time that favored natural gas over electricity use. Only as electric utilities diffused to markets that were not previously dominated by the political influence of established gas companies, or became dominant themselves, was the technology able to evolve along its own trajectory. Because the utilities have been able to maintain prohibitive charges, today’s solar and other small-scale power technologies are effectively prevented from taking hold. Instead, they must enter the market as either small-scale (rooftop solar) or large-scale (utility-scale) projects, neither of which are necessarily the best scale for commercial success.

Suffice to say, the challenges of pursuing sustainable innovations reflect in large part the distinct challenges of driving change in brownfield, or mature, markets and the technical, economic, and political resistance that such markets present. Entrepreneurs, corporate leaders, and policy makers should recognize these differences as they set innovation strategies for their companies or the country.