261Megaregion Planningand High-Speed RailPetra Tod.docx

261
Megaregion Planning
and High-Speed Rail
Petra Todorovich
c h a p t e r 2 4
?
On April 16, 2009, President Obama stood before an audience at
the Eisenhower
Executive Office Building and made an announcement that
signaled a new era of
passenger rail in the United States. Months before, the
American Recovery and
Reinvestment Act (ARRA) had provided $8 billion for a new
program at the
Federal Railroad Administration (FRA) to issue competitive
grants to states to
make capital investments in high-speed and conventional
passenger rail. Little did
the president know that providing the single largest boost for
intercity rail plan-
ning in this country in a generation had also motivated a sudden
and giant leap for-
ward in planning and governing megaregions. Luckily, regional
planners had been
studying emerging megaregions for the previous five years, in
affiliation with the

New York–based Regional Plan Association’s (RPA) America
2050 program. Again
and again, the planners had identified high-speed rail as the key
transportation
investment to serve megaregion economies. But high-speed rail
was a distant
dream. That all changed with the passage of ARRA at the nadir
of the Great
Recession. Now a federal program exists to support high-speed
rail planning
and implementation. Making that program a success will largely
depend on the
ability of multiple actors at the local, regional, state, and
binational levels to come
together as megaregions to coordinate and leverage federal rail
investments.
Revisiting Megalopolis: RPA Resurrects
the Megaregion Idea
As if planning for the Tri-State New York metropolitan region
was not sufficiently
complicated, in 2005 the Regional Plan Association launched a
national program
called America 2050 that focused on the emergence of a new
urban scale: the
megaregion. This was not actually a new concept for RPA. In
1967 a volume of the
Second Regional Plan documented the emergence of “The
Atlantic Urban Region,”
an urban chain stretching 460 miles from Maine to Virginia
(Regional Plan
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EBSCO Publishing : eBook Academic Collection (EBSCOhost)
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AN: 435124 ; Montgomery, Carleton.; Regional Planning for a
Sustainable America : How Creative Programs Are Promoting
Prosperity and Saving the Environment
Account: s7380033.main.cmmc
Association 1967). Earlier that decade, French geographer Jean
Gottmann had
coined the term “Megalopolis” to describe the same region in
his 1961 book,
Megalopolis: The Urbanized Northeastern Seaboard of the
United States (Gottmann
1961). The Northeast’s more or less continuous urbanization

from the northern
suburbs of Boston to the southern suburbs of Washington, D.C.,
had attracted the
attention of Gottmann and RPA. But in 1967 RPA observed that
while this chain of
settlements containing 42 million people surely derived some
benefit from their
mutual proximity, the larger form of the Atlantic Urban Region
was still composed
of more or less independent metropolitan regions.
By 2005, when RPA revisited that larger form, the autonomy of
the Northeast’s
metropolitan regions was starting to wane. Rapid, low-density
sprawl was erasing
the formerly distinct boundaries between the New York and
Philadelphia metro-
politan regions, and between Philadelphia and Wilmington. The
term “extreme
commutes” had been coined by the U.S. Census to describe road
warriors traveling
more than ninety minutes each way to their jobs, with many of
them located in the
Northeast. And intercity business travel within the Northeast
was also growing.
The four most congested airports in the country were located in
New York City,
Newark, and Philadelphia. With 251 daily flights taking place
among the
Northeast’s major airports, and 40 percent of Amtrak’s rail
ridership taking place
on the Northeast Corridor, a Northeast Megaregion was moving
from a spatial
construct to reality (RPA 2007).
But at the dawn of the twenty-first century, the forces making

the Northeast
Megaregion a more cohesive and integrated megaregion were
also threatening its
demise. Growing congestion in its roads, rail network, and
airports; rising house
costs; loss of open space; and threats to clean drinking water all
contributed to
imperil the Northeast’s future as an economic competitor and
healthy and pleas-
ant place to live. In other words, the Northeast was (and is)
heading toward the
dystopian vision of Megalopolis—a region of continuous sprawl
with infrastruc-
ture systems that are too crowded and too deteriorated to
function efficiently,
a high cost of living, and a natural environment that has
suffered the impacts of
an aggressive human footprint. As Regional Plan Association’s
president, Robert
Yaro, frequently remarks, “The Northeast has all the
disadvantages of being the
most expensive, densely populated, and congested region in the
country—and
none of the advantages.” The subtext of this statement is that
we need to flip the
equation around and capture the benefits of having the most
population density,
the most expansive rail transit network, and the largest
concentration of skilled
workers in the nation. To do so, RPA set out to understand the
larger phenomenon
of megaregions and how they were playing out around the
country.
Scaling Up: America’s Emerging Megaregions

In 2004 Robert Yaro, Armando Carbonell, and Jonathan Barnett
led a graduate
planning studio at the University of Pennsylvania called Plan
for America. The Plan
for America studio traveled to Europe on spring break to meet
with Sir Peter Hall at
s o c i e t y , e c o n o m i c s a n d p l a n n i n g262
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University College London, where students and professors alike
were inspired by
the European Spatial Development Perspective (ESDP), a 1999
policy statement on
balanced growth in the European territory. The imaginative
spatial planners behind
the ESDP had identified large urban agglomerations in Central
Europe like the
Pentagon and the Blue Banana (Faludi 2002). Also called
“global integration zones,”
these networked cities and regions in the EU were supported by
open border
policies among EU member states and strengthened by EU
investments in the
Trans-European Network and high-speed passenger rail.
Adopting a similar spatial
perspective on urban networks in America, the Penn students
identified a series of
possible “supercities,” which were later redefined by RPA as
megaregions.

RPA launched its America 2050 program after the Penn students
issued their
final report in spring 2004. The RPA prospectus on America
2050 outlined the case
for adopting a megaregion perspective and national plan (RPA
2006). Generally, it
argued that five major trends shaping the United States
demanded a national plan-
ning and infrastructure strategy for accommodating future
growth. They included
the following:
• America’s rapid population growth, about 130 million
additional people by 2050
• Overburdened and deteriorating infrastructure systems
• The urgent need to mitigate climate change and reduce our
dependence on
fossil fuels and oil imports
• Growing social and economic disparities within and between
regions
• And the emergence of a new urban form: megaregions
Megaregions are networks of proximate metropolitan regions,
connected
by transportation systems, natural systems, settlement patterns,
and linked
economies. Eleven emerging U.S. megaregions capture over 70
percent of the
nation’s population and jobs (see fig. 24.1). They present a new
scale at which to
plan and coordinate large infrastructure and natural systems—a
scale at which
there are few examples of governance models, let alone
institutions capable of
planning or financing complex systems like high-speed rail.

Given this vacuum,
America 2050 set out to address a planning void at two different
scales: federal,
where leadership would surely be required to help plan, finance,
and facilitate
partnerships needed to meet the challenges described here; and
the megaregion,
by conducting research, building coalitions, and identifying best
practices for
megaregion planning and coordination.
The first several years of the America 2050 program were spent
building a base
of research to underpin our understanding of megaregions and
verify that this
urban form was present outside the Northeast. All of the
research that America
2050 assembled is located permanently on the America 2050
website in its research
section. During this time, RPA began to think about
megaregions as organized
around specific relationships that present themselves at the
larger scale—such as
water resources in the Great Lakes Megaregion, intercity rail in
the Northeast
Corridor, a common coastline and vulnerability to natural and
man-made
disasters in the Gulf Coast, seaport and goods movement issues
in southern
f i n d i n g a c a t a l y s t i n h i g h - s p e e d r a i l 263
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California, and urban sprawl in northern California.
Recognizing these critical
relationships was the key to unlocking interest by regional
stakeholders in cooper-
ating with each other. “You’re in a megaregion; do something
about it” was not a
compelling opening line. However, they found that “working
with your neighbors
is critical to solving fill-in-the-blank” elicited much more
interest.
From 2005 to 2008, megaregion studies were conducted in eight
megaregions,
mostly at or in partnership with graduate planning schools,
including University of
Pennsylvania, Georgia Tech, Portland State University, Arizona

State University,
University of Michigan, and University of Texas at Austin. In
addition, several
councils of governments in California (Sacramento Area
Council of Governments,
San Diego Association of Governments, and Kern County)
published a study of
the Southwest Megaregion, which led to their continued
cooperation on goods
movement and airport planning. In Florida, the South Florida
Regional Planning
Council prepared a study of the Florida Megaregion and
convened a conference
around it in 2006. In northern California, the independent
planning and civic
organization SPUR published a study of the Northern California
Megaregion,
stretching from the Bay Area to Sacramento. Following the
SPUR study, trans-
portation officials from across the megaregion came together to
submit a joint
application for a northern California freight program that was
successful in secur-
ing $840 million from the California Transportation
Commission, an achievement
they regarded as a “coup” (Nelson 2008).
Rail Advocacy in the Northeast Corridor
Back in the Northeast Megaregion, RPA helped revive a
coalition of business groups
that had previously advocated for Amtrak funding to form the
Business Alliance for
Northeast Mobility. With a reinvigorated membership of about
thirty chambers of
commerce and civic organizations from Maine to Virginia, the

Business Alliance
began lobbying Congress in 2006 for increased rail funding to
bring Amtrak’s
Northeast Rail Corridor to a state of good repair. The Business
Alliance focused on
turning one of the key disadvantages of the Northeast’s
geography—fragmented
governance among twelve states—into a political advantage—
twenty-four U.S.
senators and dozens more U.S. representatives. The Business
Alliance held several
rail advocacy events at the U.S. Capitol and at Union Station in
Washington, D.C.,
in 2007–2008 with members of the Northeast Delegation. The
strategy seemed to
work. In 2008, after previous unsuccessful attempts, Congress
passed the Passenger
Rail Investment Improvement Act, which authorized
approximately $13 billion in
funding for Amtrak over five years and set up a new High Speed
Intercity Passenger
Rail program at the Federal Railroad Administration that
provided competitive
grants to states to invest in capital improvements for passenger
rail. This new
program was put to use immediately, by serving as the
legislative vehicle for the
$8 billion appropriation of high-speed rail funding in ARRA.
The subsequent year,
federal appropriators reaffirmed their commitment to the high-
speed rail program
with another $2.5 billion for the high-speed program.

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With painful irony, a relatively small share of the money made
its way to the
Northeast Corridor. The Business Alliance had gambled on
advocating for
increased national rail funding, because about half of Amtrak’s
annual capital
investments are typically made in the Northeast Corridor,
Amtrak’s largest rail
infrastructure asset. And, indeed, approximately $706 million
included in ARRA
for Amtrak came to the Northeast Corridor in 2009, along with
additional funding
in the 2010 annual appropriation (Federal Railroad
Administration 2010). But little
of the $8 billion in high-speed rail grants came to the Northeast
Corridor, for two
frustratingly technical reasons. None of Amtrak’s Northeast
Corridor projects
could be completed in two years—a statutory requirement of the
stimulus bill—
and the Northeast Corridor states had recently initiated a master
planning process
for 2030, which had triggered the need for a new, corridor-wide
environmental
impact statement (EIS). All of the high-speed rail grants from
the stimulus bill
required a completed EIS, and the Northeast Corridor’s had yet
to begin and
would certainly take a minimum of two years. So after playing a
role in securing
rail funding for the entire country, the Northeast Corridor sat on

the sidelines as
the largest passenger rail grants in decades were doled out in
California, Florida,
the Midwest, and other regions.
On the bright side, being passed over seems to have acted as a
wake-up call
to transportation officials in the Northeast states, who have
reemerged with
greater motivation to better coordinate in the future for federal
funding. In
June 2010, eleven Northeast states submitted an application to
the FRA for $18.8
million in planning funds to conduct a comprehensive planning
study for the
Northeast Corridor, building on the master plan. The new
planning study would
allow Northeast states to break out individual capital projects
on the corridor
with independent utility that could be funded through the
federal high-speed rail
program and complete the required EIS for the corridor for a
doubling of ridership
by 2030. Of most interest to this author, the planning study and
EIS would also
consider a true high-speed rail option of building two new
dedicated tracks along
the Northeast Corridor for high-speed trains, significantly
increasing capacity and
reducing trip times on the corridor—and competing with the
other world-class
high-speed rail systems being planned in California and Florida.
Such an outcome
could be the key to realizing the promise of an integrated
Northeast Megaregion
economy and act as the ultimate test for megaregion

cooperation.
Megaregions and High-Speed Rail
High-speed rail is not just a test for megaregion coordination; it
also promises
great reward. In fact, it is likely that only with the fast and
convenient ground
connections provided by high-speed rail can megaregions
realize the productivity
benefits of their metropolitan economies acting as integrated
units. This is the
difference between the Northeast Megaregion’s dystopian future
and the desired
path. High-speed rail could act as the main intercity
transportation spine for an
expanded megaregion-scale rail transit network, enhanced with
transit oriented
s o c i e t y , e c o n o m i c s a n d p l a n n i n g266
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development. A Northeast megaregion (and other megaregions)
linked by high-
speed rail could potentially realize the following benefits:
• Increased productivity for service-based businesses gained by
time savings
and increased mobility. Faster, more frequent, and reliable
connections that
enable business trips among the specialized economies of the

Northeast
(i.e., education and health services in Boston; financial services
and media in
New York; government and professional services in
Washington) can foster
greater productivity for the megaregion as a whole.
• Expanding the scope of labor markets accessed by major
employment centers.
Faster rail connections between employment hubs and adjacent,
smaller cities
and residential areas can deepen labor markets, giving
employers access to
more workers and providing workers with more and cheaper
housing options
(Martin Prosperity Insight 2010).
• Bringing smaller and underperforming cities within two-hour
commuting
distance of major employment hubs (like Boston, New York,
and
Washington) can potentially benefit cities like Hartford,
Worcester, and
Philadelphia, which have been losing jobs steadily in recent
decades. This
could also take pressure off the housing market in larger cities,
if workers
can work in New York and live in Philadelphia, for example
(Regional Plan
Association 2007).
• Focusing development and real estate opportunities around
stations.
Rail passenger stations provide focal points for transportation-
oriented
development, such as new office, retail, institutional, and

residential
development. Focusing development around transportation hubs
can reduce
the need to drive, enliven and activate communities, and
promote energy
savings through transportation and building related efficiencies.
Regional planning must recognize and capitalize on the self-
interest of local
actors that make up a region in order to be successful.
Megaregion planning is no
different in its need to tap into the mutual self-interest of
component metropolitan
actors. Yet megaregion planning is even more difficult than
regional planning
because the megaregion scale is less connected to individuals’
daily experiences
than the metropolitan region. In light of these challenges,
America 2050 has found
that megaregion cooperation must be motivated by the promise
of clear and
tangible rewards to be gained by megaregion cooperation. Such
rewards, in the
form of federal high-speed rail planning grants, have recently
brought megaregions
together to develop corridor-wide rail plans and explore
governance models
for finance, construction, and rail service operations. These
regions, particularly
those that span multiple states and international boundaries,
will need to
establish formal partnerships to manage major procedures like
procurement and
financing. The greater promise of high-speed rail—increased
productivity, access
to larger job markets, promoting sustainable land development,

and revitalizing
cities—will require a broader regional planning perspective at
the megaregion
scale. In this way, high speed is providing a laboratory for
megaregion planning.
of-use
WPC 480.
Week 8
1
For next week…
Complete Case Paper #3 on Aldi
Due at our next class March 19th
Focused on Cost Leadership and Differentiation Strategies.
NO Blue Ocean!
NO Business Models
Focus on Chapter
(After tonight – it’s Spring Break)
2
Generic Business Strategies

Differentiation
Seeks to create higher value than competitors
Offers products or services with unique features
Keeps the firm’s cost structure as low as possible
Charges higher prices
Cost Leadership
Seeks to create similar value as competitors
Products or services delivered at lower cost
Charges lower prices
Business-level Strategies
Cost leadership

Sources of keeping costs down and prices low
Cost of input factors (supplier power matters here)
Economies of scale
Employing specialized systems and equipment
Minimum efficient scale – increases in volume do not lead to
further cost reductions
Implies large market share almost always to get the best
economies of scale
8
Cost leadership:
It takes time to reduce costs
Learning Curve Effects – price drops (and quality increases) as
volume increases over time
Versus Economy of Scales: Economy of Scales are a specific
points in time versus accumulation over time
Differences in Complexity: Depending on product/service EoS
may have stronger impacts than learning curves
Experience Curve Effects – price drops (and quality increases)
with changes in technology of production
Process Innovation: changes in technology allow increased
efficiency with same output volume.
Technology can be changes in methods or machinery
9
Attributes of the Product/Service offering
Relationships between company and consumers
Linkages within or between firms

Differentiation Strategy
Blue Ocean Strategy
Value Innovation: Aligning consumer utility, price and cost for
maximizing value to company and consumer – product
differentiation and low cost.
8
Blue Ocean Strategy
Strategy Canvas: Captures current state of the known market
place and action framework to explore alternatives.
9
Blue Ocean Strategy
4 Action Framework: To assist in creating a new value curve
the 4 Action Framework helps evaluate the tradeoffs between
differentiation and cost.

10
Blue Ocean Strategy
11
Blue Ocean Shift
12
Activity
In your group, identify a company who has a Blue Ocean
strategy
Identify that BO company’s competitors or industry
Identify the factors that consumers use to make decisions about
their purchases with this company.
What factors were raised/created by the BO company or
eliminated/decreased?
13
Risks of Blue Ocean
Finding the right blue ocean – easy to say but hard to
find/create
Arriving too early and/or Being too new, too different – are
consumers ready?
Strategy Execution – Right leaders?
Strategic Clarity and Mindset – ready for the challenges from
top to bottom
Trust and Patience

How defensible is your new ocean?
14
Blue Ocean vs. Yoda
15
Tradeoffs
Maintain a focus on the consumer
Who won’t buy the products/services, or which
potentially profitable consumers are ignored or
avoided?
Mutually exclusive choices to commit resources
Tradeoffs give something up – they “hurt”
Resource commitments other firms cannot easily match
Questions for you as an analyst
Sufficient consistency in tradeoffs over time?
Inconsistency creates a “stuck in the middle” situation where
the firm is not great at any one thing
Strategic discipline to avoid being “stuck in the middle”
No firm starts wanting to be stuck in the middle
Discipline over time required to be true to tradeoffs
How do these threaten discipline in tradeoffs?
Customers
Employees
Management
Shareholders

Technology
The Conundrum
18
Drew Houston, Founder of DropBox
Attributes of the Product/Service offering
Features, Complexity/Simplicity, Location
Relationships between company and consumers
Customization, Marketing, Brand, Services
Linkages within or between firms
Enhancing connections to other parts of a business or to another
business
Complement – consuming in tandem
Networks
2018 US
best sellers by volume
1. Ford F Series 909K
2. Chevy Silverado 586K
3. Ram Pickup 537K
4. Toyota RAV4 427K
5. Nissan Rogue 412K
How are they differentiated?
6. Honda CR-V 379K
7. Toyota Camry 343K

8. Chevy Equinox 333K
https://www.automobilemag.com/news/year-auto-sales-facts-
figures-bestsellers-2018/
https://www.caranddriver.com/news/g25558401/best-selling-
cars-suv-trucks-2018/?slide=25
20
Problem of sustaining:
What won’t we do?
US$211,000 Lamborghini Urus
US$33,000 Nissan Rogue Sport
US$130,000 Porsche Cayenne
US$171,000 Maserati Levante
US$40,000 Volkswagen Tiguan
US$46,000 Mazda CX-9
Activity
Breaking into groups
Consider ASU and its competitors
How is ASU Differentiated?

How is W. P. Carey Differentiated?
What factors would you highlight for each of the above?
22
Managerial levers to differentiate a firm strategically
Clear goal for strategy (the constant checklist)
Who?
What will we satisfy?
Why do we want to do this?
How we will do this?
Levers to differentiate
Product features (blurs w/marketing)
Customer service (blurs w/operations here)
Complements (blurs w/industry boundaries AND competitors)
Example: Disney World, Sea World, Universal Studios and
Orlando air flights
Networks effects, or why not to buy a Fiat in the U.S.
What is meaningful about being a differentiator?
How does this strategy motivate people by making them feel
meaningful?
How do you know you have made progress and improvement as
a differentiator?
What are reasons employees might enjoy being a differentiator?
Product Characteristics

Unique, special, premium
High service, new product launches
Acceptable price
Goal
Increase perception of value
Capture perception with higher prices
Resources are focused on
Creating higher value
Marketing & Promotion
Innovation/ Exploration
Differentiation Response to Five Forces
Threat of Rivalry

customer’s brand loyalty to differentiated product offsets price
competition
Power of Buyers
well differentiated products reduce customer sensitivity to price
increases
Power of Suppliers
absorb price increases due to higher margins
pass along higher supplier prices due to buyer loyalty
Differentiation Response to Five Forces
Threat of New Entrants
differentiation sets a high bar on performance and brand
Threat of Substitutes
brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands

Competitive Risks of Differentiation
The price differential between the differentiator’s product and
the cost leader’s product becomes too large
Differentiation ceases to provide value for which customers are
willing to pay
Experience narrows customers’ perceptions of the value of
differentiated features
Counterfeit goods replicate the differentiated features of the
firm’s products
For next week…
Complete Case Paper #3 on Aldi
Due at our next class March 19th
Focused on Cost Leadership and Differentiation Strategies.
NO Blue Ocean!
NO Business Models
Focus on Chapter 6

(After tonight – 0 class till Spring Break)
29
WPC 480.
Week 10
1
Upcoming Assignments
Quiz 5 – Chapter 8 March 26th - Due today
Quiz 6 – Chapter 9 April 2nd
Quiz 7 – Chapter 12 April 9th
SAS Paper #4 – April 16th
Quiz 8 – Chapter 10 April 23rd
Group Analysis Paper – April 23rd
Exec Interview Presentation – April 30th
Final Exam – May 7th Thursday 6 PM to 7:50 PM
2
For next week…
Topic: Corporate Strategy: Mergers & Acquisitions…
Textbook Reading: Chapter 9
Quiz #6 over Chapter 9 due April 2nd
Need volunteer for Chapter 9 mini-case presentation on Lyft.

(After tonight – 6 classes till end of semester)
3
Growth
4
Growth Options
Diversification – Increase in variety
Vertical Integration – Forward or Backward on value chain
5
Industry 1
Diversification
Industry 2
Vertical Integration
Diversification
6

7
8
Related Diversification
Firms create value by building upon or extending:
resources
capabilities
core competencies
Economies of Scope
Cost savings that occur when a firm transfers capabilities and
competencies developed in one of its businesses to another of
its businesses

Economies of Scope
Operational EoS: Shared activities or leveraging core
competencies or transferring skills among units
Financial EoS: Internal capital markets – moving capital
between units.
(The only EoS that unrelated diversification can accomplish)
Honda
11
Manufacturing Platforms
Innovation Activities
Shared Activities
Lightweight, reliable engines
Realized as Diversification
Stand alone
Marine
Vehicles
Yard Care
Generators
Boats Watercraft
Cars, SUV, Vans
Lawn mowers Snow Blowers
Core Products
Building Core Competencies
Firms can diversify to build new competencies to transform the
corporation

12
Restructuring
Guide to Structure: Growth/Share Matrix
Different investment strategies
13
Firm Performance
14
Vertical Intregation
15
Growth Options
Diversification – Increase in variety
Vertical Integration – Forward or Backward on value chain
16
Industry 1
Diversification

Industry 2
17
Make or Buy?
When firms are more efficient than the market then consider
vertical integration
18
Transaction Costs
External transaction costs
Searching for a firm or individual with which to contract
Negotiating, monitoring, supervising and enforcing the contract
Internal transaction costs
Recruiting and retaining employees

Paying salaries and benefits
Setting up a shop floor
Providing office space and computers, etc.
Risk of Opportunisum: greatest with asset specificity problems
Make or Buy?
20
$4.80 Foods
(Mozzarella Cheese)
Where your pizza comes from
Dairy Farmers
(milk)
Crop Farmers
(Alfalfa & Corn)
Seed Companies
(Alfalfa & Corn)
Food Distributors

Pizza Chains
End Consumer
Value Chain
21
$4.80 Foods
(Mozzarella Cheese)
Dairy Farmers
(milk)
Crop Farmers
(Alfalfa & Corn)
Seed Companies
(Alfalfa & Corn)
Food Distributors

Pizza Chains
End Consumer
Backward
Vertical
Integration
Forward
Vertical
Integration
22
Activity
Determine how diversified your company is per the matrix?
How have they diversified?
Have they vertically integrated? From what starting point and
in what direction?
Selected Companies
24

Value Creation vs Costs
25
26
WPC 480.
Week 7
1
For next week…
Topic: Differentiation & Niches based on readings below…
Textbook Reading:
Chapter 6, Chapter 5 (pgs 165 – 171)
Submit an article on a corporate merger or acquisition that’s not
completed yet if you haven’t.
(After tonight – 1 class till Spring Break)
2

Team Presentation
Strategy
Mission: A firm’s long term purpose – what it aspires to be and
what it will avoid in the meantime.
Objectives: Specific measurable targets a firm can use to
evaluate the extent to which it is realizing its mission.
Strategy
What is strategy?
Your strategy is your theory of how to excel at the game you are
playing
A firm’s strategy is its theory of how to achieve high levels of
performance in the markets and industries within which it is
operating.
Strategy is a position:
Combine resources & capabilities that ‘position’ your firm in
the industry
Different positions in the industry are subject to distinct 5-
forces
Generic strategies:
Differentiation – design strategies with core competencies to
increase willingness to pay for target customers more than it
increase costs for the firm
Cost-leadership – design strategies with core competencies to
lower costs for the firm by more than it decreases willingness to

pay for target customers
Strategy
Blue Ocean Strategy
7
Blue Ocean Strategy
Value Innovation: Aligning consumer utility, price and cost for
maximizing value to company and consumer – product
differentiation and low cost.
8
Business-level Strategies
Customer Focus
Key Issues in Business-level Strategy
Who will be served?

What needs will be satisfied?
How will those needs be satisfied?
Tradeoffs (stop imitators)
Triad necessary for successful strategy
Strong Positioning (competitive strategy) creates guides for
making tradeoffs and creating organizations that fit
Consistent tradeoffs create an organization that fits a
competitive strategy and helps create barriers to competition
Fit creates capabilities and resources that can be a guide to
creating a strategy and making tradeoffs.
Positioning (vs competitors)
Fit (inside & outside)
The Triad
Cost leadership
Confusing name – it really is about having the lowest price in
your industry
Generally low price requires lowest costs everywhere, but
lowest prices are relative to competitors (so could be high
absolute costs in some cases)
Sources of keeping costs down and prices low
Cost of input factors (supplier power matters here)
Economies of scale
Employing specialized systems and equipment
Minimum efficient scale – increases in volume do not lead to

further cost reductions
Implies large market share almost always to get the best
economies of scale
8
Cost leadership:
Learning Curve Effects – price drops (and quality increases) as
volume increases over time
Versus Economy of Scales: Economy of Scales are a specific
points in time versus accumulation over time
Differences in Complexity: Depending on product/service EoS
may have stronger impacts than learning curves
Experience Curve Effects – price drops (and quality increases)
with changes in technology of production
Process Innovation: changes in technology allow increased
efficiency with same output volume.
Technology can be changes in methods or machinery
9
Cost leadership:
Cost Leadership requires optimization of value chain overall,
not just single steps
Supplier/buyer relationships matter
May increase costs in one step to lower them overall
Ex: a costly automated packaging line lowers costs when
demand is variable/grows
Cost reductions must not threaten to impact product or service
quality – they should increase or maintain quality
9

Cost leadership:
Discipline in managing growth
Growth can cause diseconomies of scale also
Example: increasing layers of hierarchy as firm grows if it
doesn’t decentralize
Success does not, generally, lead to people being “tighter” with
money
Have to fight the impulse to start adding extra costs because
doing well
Success can lead to a sense of higher status which can lead to
increased spending to match new status
Discipline includes unchanging rules about what to NOT to do
Example: never increase profits when costs go down; keep
margins the same
Prohibitions on specific actions are easier to follow and
communicate than abstract goals
10
Cost Leadership: Requires a culture of discipline and long view
of time
Needs to be a value everyone agrees upon to keep prices and
costs low
Continuous improvement only comes from a long-term
commitment
Top management has to keep focus to avoid growth traps and
getting “stuck in the middle”

11
Cost Leadership Strategy
Product Characteristics
Relatively standardized (commoditized) products
Features broadly acceptable to many customers
Lowest competitive price
Goal
Reduce the firm’s cost below its competitors
Offer adequate value
Resources are focused on
Reducing cost/ exploiting efficiencies

Reducing prices for customers
Activity
18
Create a 2x2 with the company and the competitors – Value on
one axis and your choice on the other axis
Tell us the factors aligned with the Cost Leadership Strategy.
Supported with examples with activities, resources or
capabilities
How did they build or acquire these?
19
Activity
Auto Industry – Hynduai, Kia
Hotels – MicroTel, Motel 6
Mattresses – Casper, Tuft&Needle
Real Estate Listings – Redfin
Car Care – JiffyLube
Personal Care Products – Razors

Car Rentals – Budget
20
Cost Response to Five Forces
Threat of Rivalry
rivals hesitate to compete on basis of price
lack of price competition leads to greater profits
Power of Buyers
drives prices far below competitors, causing them to exit, thus
shifting power with buyers (customers) back to the firm
increase switching costs
Power of Suppliers
able to absorb cost increases due to low cost position.
able to make very large purchases, reducing chance of supplier
using power

Cost Response to Five Forces
Threat of New Entrants
enter on a large scale in order to be cost competitive
increase the time it takes to move down the industry learning
curve
Threat of Substitutes
lower prices in order to maintain its value position
make investments to add features unavailable in substitutes
Risks of Cost Leadership Strategy
Processes used may become obsolete
Erosion of Margins
Competitors catch up and erode cost leader’s advantage

Competitors shift consumer focus to non-price attributes
Competitors, using their own core competencies, may
successfully imitate the cost leader’s strategy
Cost reductions may occur at expense of customers’ perceptions
of value (cheap)
07-042
July 25, 2007
This case was prepared by Professor Rebecca M. Henderson,
Joel Conkling and Scott Roberts. Professor Henderson is the
Eastman Kodak Leaders for Manufacturing Professor of
Management
Copyright © 2007, Rebecca M. Henderson. This work is
licensed under the Creative Commons Attribution-
Noncommercial-No
Derivative Works 3.0 Unported License. To view a copy of this
license visit http://creativecommons.org/licenses/by-nc-nd/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite
300, San Francisco, California, 94105, USA.
SunPower: Focused on the Future of Solar Power
Rebecca M. Henderson, Joel Conkling and Scott Roberts

It was December 2006. Tom Werner, CEO of SunPower, glanced
down at his watch and shook his
head in dismay. His run was not going well, despite the sounds
of John Lee Hooker’s “Boogie
Chillen” coming through his earphones. He blamed the board
meeting later that afternoon.
Given SunPower’s position as the producer of the world’s most
efficient solar cells, also known as
photovoltaics or PV, and recent forecasts that solar power might
be on the edge of explosive growth,
he knew that he’d be asked some tough questions. Werner
wondered how fast the solar power
industry was likely to grow and how long SunPower’s
advantage was likely to last. How could
SunPower compete with much larger companies like Sharp and
Q-Cells? Or with the niche
“technology play” firms that were springing up? How could
SunPower’s current advantage be turned
into an enduring competitive edge?
As the sun began to rise, Werner picked up the pace again, and
began jogging home.
Environmental Issues
One of the most important drivers of the world’s renewed
interest in solar power was its ability to
offer energy independence in combination with significant
environmental benefits. After all, the earth
received more energy from the sun than humans consumed
throughout an entire year. Since the
burning of fossil fuels generated a number of noxious

substances including SO2, NO, NO2, and
particulates, concerns for human and environmental health had
driven interest in solar power from its
earliest days. But evidence that rising concentrations of CO2 in
the earth’s atmosphere could pose
large long-term environmental risks had significantly increased
interest in the technology.
SUNPOWER: FOCUSED ON THE FUTURE OF SOLAR
POWER
July 25, 2007 2
For over a century, scientists had observed the “greenhouse
effect,” the warming of the earth caused
by the atmosphere’s increased absorption of infrared radiation
resulting from increased concentrations
of CO2 and other greenhouse gases in the atmosphere.
Levels of CO2 had risen from around 280 parts per million
volume (ppmv) before the industrial
revolution to 380ppmv in 2006 higher than at any point in more
than half a million years. Data
presented in the Intergovernmental Panel on Climate Change’s
(IPCC) 4th Assessment Report, a 6-
year study on global warming involving 2,500 leading scientists
from 100 countries, provided even
more alarming statistics. For example:
• Greenhouse gases rose 70% between 1970 and 2004 (28.7 to
49 billion tones per year in
carbon dioxide).

• CO2, which accounted for more than 75% of emissions,
increased by 80% between 1970 and
2004.
• Developed countries while accounting for 20% of the global
population, contributed 46% of
global greenhouse gas emissions.
• Greenhouse gases were projected to increase between 20% and
90% by 2030 unless
significant changes in global energy policies were made.
Looking longer-term, many studies suggested that increasing
concentrations of green house gases
greatly increased the odds of catastrophic climate change. One
study published in the journal Nature
predicted that temperature increases of 3.24–3.6°F and CO2
increases to 500–550 ppmv would result
in the extinction of 1,000,000 terrestrial species (25% of all
land animals and plants) by 2050.1
Meanwhile, average global temperatures had already risen
1.33°F since 1906—and polar
temperatures were rising faster still.
Most scientists believed that the stabilization of CO2 levels was
urgently required, but just what
concentration constituted a “sustainable” CO2 level was a
matter of some uncertainty. The IPCC
report suggested three scenarios (Table A) for emission
stabilization by 2030 and the impact such
cuts would have on global warming and world GDP growth.
Table A Stabilization Scenarios
Emission Output Rise in Global

Warming
Cost to Annual GDP
Growth in 2030
Scenario A 445-535 parts per million (ppm) 3.6 - 5.0°F 0.12%
Scenario B 535-590 ppm 5.0 - 5.8°F 0.1%
Scenario C 590-710 ppm 5.8 - 7.2°F 0.06%
31 Marinez Ferreira de Siqueira, Alan Grainger, et al.,
“Extinction Risk from Climate Change,” Nature, January 8,
2004,
427, p. 145-148.
POWER
July 25, 2007 3
Scenario A, involving the most aggressive action, would result
in a 3% cumulative cost to annual
world GDP growth by 2030. At 2006 growth rates, however,
global concentrations would reach 800
ppmv by the end of the 21st century.
A sense of urgency about global warming had prompted many
countries to search for aggressive,
coordinated strategies to reduce CO2 emissions. (Table B gives
CO2 emissions for electricity
production by fuel type.) The most far-reaching attempt, the

Kyoto Protocol, committed a number of
countries to modest CO2 reductions by a 2012 deadline. As part
of this “emission cap” approach,
some signatories allocated CO2 emissions allowances to
individual firms. The Kyoto Protocol
permitted these allowances to be traded across borders, creating
a “carbon market.” For example, a
Spanish factory might find it profitable to reduce its emissions
by a given amount and sell the
allowances to another factory in Italy that planned to exceed its
own quota. Even signatories that had
not committed to emissions cuts could participate. These
countries—mainly large developing
countries such as China and India—could forgo emissions and
sell them as credits to customers in
other countries.
Table B CO2 Emissions for Electricity Production
Generation Type Tons CO2 per MWh
Nuclear 0
Hydro power 0
Coal 0.999
Oil 0.942
Gas 0.439
Geothermal, Solar, Tide, Wave,
Ocean, Wind, Waste and other
0
Source: CANMET Energy Technologie Centre 2
The advent of carbon trading in Europe had generated a large
market. In the first half of 2006, over
US$15 billion worth of carbon emissions were traded, five times
more than the amount the year

before,3 and CO2 trading schemes in the United States were
being developed at the state level. As of
2006, renewable sources provided 13% of the world’s energy
needs,4 while photovoltaic systems
provided a mere .04% of the world’s electricity. The U.S.
Department of Energy estimated that the
country could supply its entire energy needs by covering .5% of
its land area with solar cells.5
2 Cited in B. Gaiddon, M. Jedliczka, Environmental Benefits of
PV Systems in OECD Cities, September 2006.
3 Economist, “Selling Hot Air”, September 7, 2006.
4 “Sunlit Uplands,” The Economist, June 2, 2007.
POWER
July 25, 2007 4
Solar Power Industry
Solar cell, or photovoltaic (PV) systems converted energy from
the sun into electric current. Solar
cell performance was measured in terms of conversion
efficiency, the proportion of solar energy
converted to electricity. The first commercial solar cells were
introduced in the 1950s by Bell Labs,
and had efficiencies below 4%.6 In 2006, PV efficiencies
ranged from 10%-20% and some scientists

believed that further research, combined with advances in
installation methods, could push
conversion efficiencies well over 20%, with 50% seen as the
long-term “holy grail.”7
A typical solar cell produced about 0.5V — roughly one-third of
a regular AA battery, far too small
to be of any practical use by itself — and cells were thus
combined in larger blocks, called modules.
Although modules varied in size, they typically included 72
cells, and yielded between 30-45V.
Once constructed, modules were typically combined in arrays or
panels which were then integrated
with “inverters” – sophisticated devices that converted the DC
power output of the solar panels or
arrays into the AC power used in conventional electrical
appliances.
While solar power was two to three times as expensive as the
retail cost of electricity,8 the market
continued to grow at a steep upward trajectory. As Figure 1
shows, module manufacturing began to
ramp up a few years after module prices hit a plateau. (Exhibit 1
provides yearly production and
price data spanning 1975 to 2005.) Solar photovoltaic power
grew an average of 41% each year
between 2003 and 2006,9 and was expected to grow 40%
annually through 2011. Industry profits
were expected to top $7.7 billion in 2007 and $11.5 billion by
2011.10 Roughly $1.7 billion in
private equity and venture capital funds went into the industry
in 2006 and another $4.5 billion was
invested in publicly traded solar companies, most of it going
toward expanding manufacturing
capacity.11

6 http://www.nrel.gov/learning/re_photovoltaics.html
7 Vaclav Smil, 2003. Energy at the Crossroads, Cambridge:
MIT Press, p. 288.
8 “Bright Prospects,” The Economist, March 8, 2007.
10 Liz Skinner, “Sun Will Shine on Solar-Energy Investing,
Report Says,” Investment News, June 18, 2007.
11 Cassidy Flanagan, “New Light on Solar Energy,” Business
Week, May 17, 2007.
POWER
Figure 1 PV Module Price and Production History, 1975-2005
PV Module Price History
$0.00
$5.00
$10.00
$15.00

$20.00
$25.00
$30.00
$35.00
19
75
19
80
19
85
19
90
19
95
19
96
19
97
19
98
19
99
20

00
20
01
20
02
20
03
20
04
20
05
U
S
$/
w
at
t
PV Module Annual Production
0

200
400
600
800
1000
1200
1400
1600
1800
2000
19
75
19
80
19
85
19
90
19
95
19
96
19
97
19

98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
M
W
Source: Maycock.

July 25, 2007 5
POWER
Producers and Consumers
Japan was the world’s PV shipment leader, shipping more than
five times the volume of the United
States (Figure 2). Since 2002, Europe had held the number two
position after it passed the United
States and by 2005, Europe was shipping three times the volume
of the United States. Analysts
blamed the erosion of U.S. PV market share to a lack of
manufacturing incentives and high
manufacturing costs.
Figure 2 Global PV Shipments, 2000-2005
Global PV Shipments
0
100
200
300
400
500

600
700
800
M
W
p
U.S.
Japan
Europe
ROW
U.S. 76.2 96.7 107.8 91.5 140.6 133.6
Japan 96.3 145 233.8 350.6 547 714
Europe 58.5 85.4 123.4 173.1 272.9 406.9
ROW 22 25.8 39.9 60 89.2 153.2
2000 2001 2002 2003 2004 2005
Source: Paula Mints, “PV in the U.S.: Where is the market
going and how will it get there?”, Renewable Energy Watch,
September 2006.

Analysts’ expectations that China was the market to watch due
to its growing energy needs, large
work force and strong industrial base were proven correct in
2006 when China surpassed the United
States as the world’s third largest producer of PV cells, behind
Germany and Japan. Lacking any kind
of domestic incentive/subsidy policy, more than 90% of China’s
PV products were exported. Chinese
PV producers raised billions of dollars in international IPOs in
2005 and 2006 to build capacity and
increase scale with the goal of driving down costs.12
On the consumer side, global PV demand had grown from 114
MWp in 1997 to 505 MWp in 2002 to
1,408MWp in 2005 and 2,500MWp in 2006 and demand was
accelerating rapidly particularly in
Europe (most especially Germany) and Japan as shown in
Figure 3. One prominent analysis of
12 Gail Roberts, “Production Trends and New Technologies
Could Push Solar Energy into Mainstream,” Electric Utility
Weekly, May 28, 2007.
July 25, 2007 6
POWER
potential demand at 2006module prices—i.e., around $3.50-
$4.50/W with policy support—estimated
that there was potential worldwide demand of approximately

5,000MWp, or double 2006 industry
sales. Meanwhile, global grid-connected solar capacity was
about 5,000MWp. In contrast, installed
wind capacity in the United States alone was 9,149MWp.13
Figure 3 Global PV Demand, 2000-2005
Global PV Demand
0
100
200
300
400
500
600
700
800
M
W
p
U.S.
Japan

Europe
ROW
U.S. 34.7 43.8 60.8 76 101.8 137.3
Japan 77.9 109.8 176.2 243.8 295.9 392.4
Europe 74.1 120 172.6 232.6 472.4 676.1
ROW 65.3 79.2 95.3 122.9 179.7 202
2000 2001 2002 2003 2004 2005
Source: Paula Mints, “PV in the U.S.: Where is the market
going and how will it get there?”, Renewable Energy Watch,
September 2006.
The Solar Value Chain
There were five key stages in solar power’s value chain: silicon
production, ingot/wafer manufacture,
solar cell manufacture, solar module manufacture, and system
installation. Firms in the industry
differed dramatically in the degree to which they participated in
each stage. (Table C shows
revenues and profits across the chain.)
Table C PV Industry Value Chain Snapshot
Year: 2006 Silicon Ingots/Wafers Cells Modules Installatio
n
# of players 20 40 100 500 5,000
Revenues ($m) 1,400 4,500 7,700 10,200 3,200
Pre-tax margin (%) 53 36 21 5 20

Capital costs ($/w/year) 0.65 0.50 0.05
Source: Solar Annual 2006
13 Gail Roberts, “Production Trends and New Technologies
Could Push Solar Energy into Mainstream,” Electric Utility
Week, May 28, 2007.
July 25, 2007 7
POWER
July 25, 2007 8
Silicon The key feedstock in the PV industry was high-purity
silicon, which was the basis for
more than 90% of solar modules. Silicon was obtained from
sand through a complex process using
numerous purification steps and temperatures up to 1,100ºC
which would turn sand into the high
purity silicon known as polysilicon.14
As recently as the early 2000s, solar cell producers sourced
silicon feedstock mainly from waste
silicon discarded during semiconductor manufacturing. This
“leftover” silicon supply included high-
purity silicon that was slightly above or below the quality
specified for semiconductor production, or
off-cuts (tops or tails) of monocrystalline ingots. For their part,
silicon producers had historically

considered solar cell makers a market of last resort, useful for
stabilizing fluctuations in the overall
semiconductor market but unlikely to amount to meaningful
scale.
The explosive growth of PV cell manufacturing, however, had
transformed the role of solar power in
the silicon business. In 2005, the solar industry used
approximately 47% of available silicon, and in
2006 it would likely account for the majority share. These fast
growing needs had stretched global
silicon supply and prices had risen dramatically from
$32/kilogram in 2004 under a long-term
contract, to $45/kg in 2005, to a predicted $55/kg in 2006 with
short-term contracts exceeding
$200/kg. However, current investment plans would triple
capacity, from 31,000 tons per year in 2005
to 100,000 tons or more by 2010,15 despite the fact that a 5,000
tons/year expansion cost roughly $300
million. The silicon shortage was expected to end around 2008
when supply was estimated to grow
70%.16
Ingots / Wafers Many large solar cell manufacturers had in-
house ingot production and wafer
sawing capabilities, including REC, SolarWorld, Kyocera, and
BP Solar. Dedicated ingot and wafer
manufacturers supplied wafers to the solar cell manufacturers
that did not have their own ingot and
wafer capabilities. Technical progress in the industry had been
rapid. In 2004 typical wafers were
250-300 microns thick, and by 2006 they were around 190
microns. However over the same period
prices had risen dramatically. In 2004 wafers were sold for
around $1.00/watt, while in 2005 the
average price was $1.25/watt and in 2006 it was expected to be

$1.90/watt.
Cells and Modules Solar cell manufacturing was a widely
understood process that involved less
than ten steps. The largest producers, which included Sharp
Solar (Japan), Q-Cells (Germany),
Kyocera (Japan), Sanyo (Japan), and Mitsubishi Electric
(Japan), together accounted for roughly 58%
of the market. Sharp was the clear market leader, with 427.5
MW of production in 2005, nearly three
times that of its nearest competitor. Between 50 and 100
manufacturers made up the rest of the
industry’s production capacity.
14 Million Roofs handout
15 Policysilicon: Supply, Demand, & Implications for the PV
Industry, Prometheus Institute, 2006.
16 Brian Womack, “Alternative Energy Sun Shines on Clean
Energy,” Investor’s Business Daily, May 21, 2007.
POWER
July 25, 2007 9
Due to the global silicon shortage, solar cell prices rose from
$2.70/watt in 2004 to $2.50/watt in
2005, and were forecast by Photon Consulting to rise to
$3.25/watt in 2006. At expected 2006 prices,
pre-tax cell manufacturing profit margins were expected by

Photon Consulting to be 21%. While
there were roughly 500 smaller module manufacturers in
operation in 2006, most of the top cell
manufacturers made modules as well. In parallel with increases
in PV cell prices, average module
prices had also risen from $3.20/watt in 2004 to $3.75/watt in
2005, and were expected to reach
$4.30/watt in 2006.
System Installation / Integration The most advanced systems
integrators had expertise
in installing megawatt-scale solar systems at low costs in fields
and on large commercial roofs.
Competition for these large projects was fierce, and margins
were tight even for the best integrators.
On the other side of the installation spectrum, small residential
installers made up the majority of the
5,000+ solar installers and integrators in operation. In general
costs and prices varied widely,
depending on the application and geographical region. Total
installation costs ranged from $1/watt to
$3/watt, and consumer prices ranged from $1.25/watt to
$4/watt. For dual-axis trackers in large field
installations, area-related costs could reach $1.50-$2.00 per
watt, while commercial flat roofs, where
aesthetics were less important, were usually around $0.60 per
watt. Residential roof installations cost
approximately $1.00 per watt for area related costs.
While solar installation was fairly simple at a very basic level
(one secured racks to the roof and then
attached modules to the racks and plugged them in), there could
be meaningful first mover advantage
for installers that developed expertise in an end-consumer
market. For example, the installer that put
a system in for a Best Buy could be rewarded with lower costs

selling to other ‘big box’ retailers
because it understood both the sales process and the needs of
that type of customer. Similarly an
installer that developed expertise in, for example, residential
installations in San Diego, could develop
lower costs in residential installation in San Diego than
potential entrants.
Pricing
Deriving an exact price for solar generated electricity was
tricky. While conventional power was sold
as a flow of power from the grid in units of $/kWhr, solar power
was typically sold as an installed
system with an upfront capital cost measured in units of $/peak
watt. Deriving a flow cost — how
much the user would actually pay for kWhrs and how much they
would pay per installed watt of
generating capacity — depended on a wide range of factors
including the life of the system, interest
rates, subsidies (if any), hours of sunshine and so on. Hours of
sunshine, for example, ranged from
nearly six per day in parts of Southern California to 2.5 hours
per day in parts of Northern Europe,
with important seasonal variation – and both interest rates and
the subsidies given to solar power
varied widely across the world.
POWER

In general, however, the average price of solar power ranged
from US 25-50¢ per kWh. For example,
as Exhibit 2 suggests, the average cost of a residential PV
system in California translated into an
electricity price, without subsidies, of roughly 31¢/kWh. In
contrast, one could generate electricity
using conventional power sources for between 4¢/kWh and
6¢/kWh (Exhibit 3). Final prices to the
consumer could be significantly higher because electricity was
expensive to distribute, but on average
conventionally generated electricity was still significantly
cheaper than solar power. According to the
Organization for Economic Cooperation and Development
(OECD), prices for household customers
started at just several cents per kWh in areas of Scandinavia and
rose to over 25¢/kWh in the highest-
priced markets such as Japan. The U.S. average was 9.6¢/kWh
in early 2006, with California prices
averaging over 13¢/kWh.
As Exhibit 4 suggests, however, the average price of electricity
told only part of the story. In
markets around the world, some customers paid significantly
more than the average price of
electricity. In California, for example, commercial customers
paid 24% more per kWh than
residential customers. Meanwhile, the state further stratified
prices into five tiers based on total
electricity usage per month. As Figure 4 shows, a California
customer that consumed more than 34
kWh per day would pay 37¢, Tier 5 prices, for every kWh over
the 34 kWh/day limit of Tier 4.
Figure 4 California Residential Power Pricing Structure,
September 2006

-
0.0 5
0.1 0
0.1 5
0.2 0
0.2 5
0.3 0
0.3 5
0.4 0
- 5 1 0 14 19 24 29 34 38 43 48
k W h p e r d a y
A ve ra g e
H o u se h o ld
C o n su m p tio n
T ier 1 T ier 2
T ier 3
T ie r 4
T ier 5

cen ts
p e r
kW h
Source: Pacific Gas and Electric.
Given its high cost, up until the late 1990s, most PV power was
used to meet the demands of “off the
grid” users. Since that time, however, more solar panels had
been sold to residential customers than
any other single segment. Panels, attached to the roof of a house
or apartment building, could in many
cases give households full or near self-sufficiency in power
supply. In markets that permitted net
metering, households also had the option to sell their excess
power to the grid. Under favorable
July 25, 2007 10
POWER
July 25, 2007 11
pricing (“feed-in tariffs”), this option could dramatically
improve the economics of a home PV
system.
Increasingly, solar systems were also finding a market among
large commercial facilities such as big
box retail stores, shopping malls, hospitals, and airports. In

most cases, solar cells were not
substituted completely for grid-based electricity, and customers
continued to purchase from the
commercial grid. Some commercial customers installed PV
systems as a hedge against high
electricity prices while others recognized the potential public
relations benefits of a “green power”
investment. Utility-scale applications were once regarded as
the main potential market for solar
power. Until the late 1990s, for example, parabolic
concentrators at three sites in California’s Mojave
Desert accounted for more than 90% of the world’s installed
solar capacity.17 However operational
and financial challenges had made this vision obsolete. The
firm that built the Mojave facilities, Luz
International, went out of business. Solar towers were also slow
to take off and only a few
experimental facilities, mostly under 1 MW, had opened in
California, Spain, Israel, Germany, and
Australia.18
Policy Support
Solar power’s potential to increase energy independence and
reduce carbon emissions had led to a
wide variety of public subsidies. Around the world, there were
more than 1,000 various pro-solar
policies put in place by international, national, and local
authorities. California’s “Million Solar
Roofs” initiative, for example, had allocated $3.2 billion for
solar power “buy-downs” through 2016.
(A buy-down reduced the upfront capital expenditure required
to install a solar system.) In some
jurisdictions, customers could sell excess solar power back to
their utility at favorable prices. Some
governments had set specific targets for the number of

households with PV systems, or renewable
portfolio standards (RPS) which required utilities to derive a
targeted percentage of power from
renewable sources and/or solar power. In South Korea, for
example, government mandated a target
of 1,300 MW of solar power installations by 2012 and in the
United States, 24 states had
implemented their own RPS. (See Exhibit 5 for list of standards
by state.)
The U.S. solar market was highly diverse. State regulations and
policies toward solar power ranged
from the supportive to the non-existent, and power prices, the
availability of solar radiation, and
public attitudes toward the environment also varied dramatically
across states. Exhibit 6 compares
the costs and savings for a solar system installed in California,
Texas and Massachusetts based on the
same monthly electric usage. While a California resident’s
estimated net cost would be roughly
$17,480, a Massachusetts resident would likely pay nearly twice
that amount. Meanwhile, rebates and
credits in the state of California ($18,250) equaled half of the
installation price. In Texas they were
38% and in Massachusetts 23%.
17 Smil, p.285
18 Ibid.
POWER

July 25, 2007 12
Quantifying public subsidy policies into a global total of pro-
solar spending was difficult, but one
analysis estimated that a total of $1.7 billion was spent by
governments worldwide in 2005 in
supporting solar power, and that this figure would surpass $3
billion in 2006.19 For companies like
SunPower subsidy programs were critical in generating demand.
But analysts believed that the
industry would be able to prop itself up without subsidies by
2012.20 Of course the key to doing so
was lowering costs and scaling up production.
SunPower
SunPower was founded in 1987 by Dr. Richard Swanson, a
professor of electrical engineering at
Stanford University. At the time it closed its Series A round of
VC financing in 1989, SunPower’s
goal was to commercialize solar concentrator21 technology.
However, according to Swanson, the
company ended up going in a different direction:
We realized that solar concentrators were a bad idea.
Conceivably, someday concentrator systems
could be a lower-cost PV alternative, but they are not now and
they have a long way to catch up
with continually improving flat-plate systems. Moreover,
concentrators are not well suited for
many small distributed, remote applications. We wrestled with
whether we should give the
money back to the VCs or not. Ultimately, we chose not to.

Starting in about 1991, SunPower
went through a long period of trying to find its way.
In the early 1990s, the Honda Motor Company approached
SunPower asking if the company, known
for its efficient solar cells, could make cells big enough to
cover Honda’s solar powered race car.
After agreeing to Honda’s request, Swanson realized there was
one barrier standing in the way of
SunPower’s ability to deliver: “We were all from academia. We
argued for about four hours one day
about whether we needed two shifts or one shift and realized
after a while we had no idea how to
figure out whether we needed two shifts or one shift.”
After hearing about SunPower’s dilemma, …

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