The first sentence in the U.S. Energy Information Administration’s publication, “Electricity Explained” is, “Electricity is measured in units of measure called Watts, named to honor James Watt, the inventor of the steam engine”. Once again, we find ourselves having to dispel a myth. The truth is that James Watt did NOT invent the steam engine. In fact, he was late by over half a century. Why then is James Watt so associated with steam power that the internationally accepted unit to measure power is named for him? The answer is that he invented a better product and, more importantly, a better business model.

James Watt was born in Grennock, Scotland. Largely self-taught, he became a metal worker and instrument builder. In 1757, Watt was offered the opportunity to set up a small workshop at the University of Glasgow to maintain and repair its collection of scientific instruments. Fortuitously, in 1763 he was asked to repair a model of a Newcomen steam engine that belonged to the university.

The Newcomen engine was the first commercially successful incarnation of the steam engine. Named for its inventor, Thomas Newcomen, it was a massive device (over 20 feet tall) that used steam power to pump water from underground mines. It had quickly became the standard for large mines throughout Great Britain but the design had changed little in 50 years, so its use had not extended to other applications.

Upon repairing the model, Watt realized that the design was massively inefficient. Because the entire chamber was reheated with each cycle, more than three-quarters of the incoming energy was wasted as heat rather than being converted to mechanical energy.  Watt set about building a better design, and ultimately devised a separate condensing chamber that got around the problem.

While he had the design, Watt had difficulty making it into a commercial product. Specifically, he struggled to find a partner with the capital and expertise to build the new engine at scale. After nearly a decade of frustration and failed ventures, he formed a partnership with Matthew Boulton, who connected him with expert iron workers in Wales.

Boulton’s other contribution was the business model. By the 1770’s, nearly all large mines already had a Newcomen engine – the de-watering problem had been solved. Owners would need to be convinced that they could save money by replacing the Newcomen engine with the new Boulton and Watt model. In order to speed adoption, Boulton devised a pricing scheme where customers would pay a percentage of the coal saved by the more efficient design. Less coal used to remove water from the mine meant more coal to sell – a straightforward and compelling value proposition.

With the Watt engine quickly becoming the standard in mining, Boulton and Watt started looking for other markets and quickly realized that in most applications the next best alternative was not an inefficient steam engine but rather an even less efficient horse. For example, the horses slowly walking in circles to power hundreds of grinding mills across the British Isles. Adapting their business model, Watt suggested the term ‘horsepower’ to refer to the number of horses that could be replaced by a steam engine in these new applications. In essence, he reduced the value proposition to one word. Needless to say, the word stuck, it is still how we refer to the power output of an engine.

Lessons for today

This historical tale highlights several key lessons for how companies should think about their strategies:

• First, it is not always about being first to market. Just like Watt did not invent the first steam engine, Sam Walton did not invent the discount store, Michael Dell did not invent the personal computer and Herb Kelleher (Southwest Airlines) did not invent the discount airline. What these founders have in common with Watt and Boulton is that they found a better business model that dramatically improved the value delivered to their customers.
• Second, linking your pricing model to how you create value can help you to sell value and accelerate market penetration. By getting paid directly out of the coal savings, Boulton and Watt both reduced the required capital expenditure and dramatically reduced the risk to new customers (“if the savings aren’t real, you don’t have to pay”). While this ‘guaranteed results’ form of pricing is not always the right answer, it is almost always an interesting thought experiment to stretch your thinking about how you could capture more of the value you create.
• Thirdly, by focusing on the problem you solve for customers, you can find ways to expand your potential market. If you have either read Grassroots Strategy or been through one of our workshops you likely remember our market definition ‘cube.’ Although by the 1780’s the Watt engine already dominated the ‘small cube’ of steam power for mining, they realized that the market for efficient mechanical power was much bigger. Adapting a new business model to sell against horses was a natural extension consistent with their right to win, but they only found it by stepping back and thinking about customer problems, not ‘products.’
• Lastly, it is not enough to have the technically best product. It was not until Watt teamed up with Boulton that he had both the resources needed to scale production and the business model required to penetrate the market. Success is almost always a team effort. Your customers pay for outcomes not ideas, so you need someone skilled in product management who can coordinate technology, operations, supply chain and the commercial team to drive results.

Conclusion

Ralph Waldo Emerson famously said, “build a better mousetrap and the world will beat a path to your door” (or maybe he really didn’t say it first, but that is a story for another day). But that classic expression only tells half the story. As Watt and Boulton discovered it takes and great product AND the right business model to drive breakthrough growth, and maybe even become a household name. What could this way of thinking mean for your organization?

Image Copyright The Casual Observer