The resource revolution

By Stefan Heck

Consulting professor at the Precourt Institute for Energy at Stanford University. Matt Rogers is a senior partner at McKinsey & Company. They are co-authors of Resource Revolution: How to Capture the Biggest Business Opportunity in a Century.

The world is on the threshold of the biggest business opportunity in a century, rivaling both the first Industrial Revolution, which transformed labor productivity, and the second, which mobilized unprecedented amounts of capital to build cities. The new revolution centers on the third primary factor of production: natural resources.

The revolution arrives not a moment too soon. After centuries of wasteful production and consumption practices - facilitated by ever-lower commodity prices that have declined by an average of 0.7% a year in peacetime over the past century - the world is in dire need of technologies that enable producers and consumers alike to do more with less.

Making matters more urgent, resource extraction is becoming increasingly expensive, as production shifts to locations that present difficult logistical - and often political - challenges. Meanwhile, levels of air, water, and soil pollution are rising rapidly in China, India, Indonesia, Brazil, and other emerging economies.

In order to achieve their growth objectives, companies must fundamentally rethink the way they integrate technology and use natural resources in their productive processes. Over the last two decades, companies have had to improve their performance by only 1-2% annually to achieve an increase in profits, and many have focused almost exclusively on capital and labor productivity. As a result, even the most successful managers lack the skills to cope with today's resource-constrained markets.

In this environment, companies cannot compete on the basis of twentieth-century (if not nineteenth-century) technologies and practices. There is much more value in pioneering new, higher-productivity business models, based on five key changes:

• Substituting costly, toxic, or scarce materials with cheaper, more efficient, higher-performance, and more abundant alternatives.

• Embedding software in resource-intensive industries to optimize their production processes or products.

• "Virtualizing" processes - that is, moving them out of the physical world.

• Embracing circularity, which entails finding value in products after their initial use.

• Eliminating waste.

The good news is that progress is already being made. America's burgeoning shale oil and gas industry, for example, has transformed its entire energy sector by revolutionizing resource extraction. Today, drilling is not only a dirty process characterized by heavy equipment, toxic mud, and sulfurous fumes. With the integration of information technology and hydraulic-fracturing ("fracking"), the central players are experts using joysticks and high-resolution screens to maneuver drill bits through geological formations.

Individual companies have pioneered change in other sectors. Cree and Philips have developed LED lighting technologies that offer 23 times longer life, measurably better color, easier control, and 85% lower operating costs than traditional incandescent bulbs.

Similarly, OPower has used behavioral science and cloud-based software to motivate consumers to cut their energy consumption by 2-4% annually - a change that is beginning to reshape power markets. And DIRTT (Doing it Right This Time) is building office interiors at as little as half the traditional cost through software-enabled virtualization, waste elimination, and optimization of the construction process.

These innovations exemplify the massive potential for businesses to improve resource productivity. Indeed, using tools provided by information technology, biology, and nanotechnology, the world can triple growth in resource productivity, raising it to 3 to 5% annually over the next two decades.

But this cannot occur without strong and forward-thinking leadership, which, unfortunately, is sorely lacking in today's business environment. Indeed, managers today seem consistently surprised by the pace of change and thus find themselves behind the curve.

For example, many automobile manufacturers ignored the shift toward electric and hybrid vehicles - though sales were increasing at a rate of more than 50% annually - until their sales of conventional cars plummeted in key markets. Likewise, many are shocked that the cost of solar power is increasingly undercutting that of nuclear, coal, and gas technologies, even though this shift is in line with a trend that began in 1970.

Companies should devote more attention to developments in related industries as well. Automakers must monitor the consumer electronics industry to track advances in battery technology. And power companies need to analyze the development of semiconductors to anticipate the likely drop in demand for electricity, after more than a century of growth.

To win in the resource revolution, companies must balance technological, physical, and human-capital inputs, while adopting a more intelligent approach to organizational design and talent management. Whether the primary imperative is spotlighting data and analytics or forming new partnerships in other sectors to gain access to specialized expertise, aggressive innovation, and ambitious efficiency goals are critical.

Forward-thinking entrepreneurs are already reaping the benefits of this fast-moving revolution. Those who fail to adapt will fail to survive - and soon.

Copyright: Project Syndicate


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