Thursday, November 27, 2014

The Resource Revolution

SAN FRANCISCO – 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.

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    1. CommentedNathan Coppedge

      Exceptionism may be a viable path if there is no exceptional folly. The environment is already being treated as disposable, with the exception of real estate, and the largest bulk resources. Yet those who can't imagine the amount of resources on earth, should not assume that resources are entirely disappearing. There is a lot of evidence that the world can be fed. The U.S. has massive waste on the subject of food provision, so it is possible to turn this, or even other wasted goods, into benefits for the needy. Furthermore, progress has finally been made against the total disappearance of the rainforest. And space mining will eventually bring new resources to bear on the world infrastructure. The real question at this point may not be how to 100% preserve the earth, but instead the age-old question of how to adapt to a changing environment. Perhaps we can prolong livability, even make it seem luxurious. This does not seem impossible right now. It's little things, like nuclear waste, that ultimately look like a problem. Evidently, 'God' thought there was a way around it, a path that was not taken... Perhaps luxurious space ships will take us to new habitats beyond the sun. But who will survive? How long can we sustain a non-disaster level on earth? This may be a lazy question now, but not always, if we ignore some of the most foolish things...

      It's always a question of not doing the worst things, rather than doing everything well... The worst things are always most of the problem. no matter how far we go down the road...

    2. CommentedRobert Snashall

      This article is really inline with my general assumption that McKinsey and all the rest of these management consultancies really just peddle bullshit.
      You start with one argument, that we are going to have a natural resource revolution, and then just chat on about technological revolutions.

    3. CommentedKir Komrik

      Thank you for pointing out something that needs to be rehashed.

      This is basically a sexed up version of the "efficiency argument". The idea is that we can be more efficient with what we have. Yes, we can. But efficiency alone won't solve our sustainability problems. As technology advances per capita energy consumption increases and it has a direct correlation to quality of life. Efficiency helps but is ultimately overwhelmed by this exponential tendency. Increasing population doesn't help either.

      I'm afraid this is a band-aid, a stop-gap measure that is not a long-term solution. In order to solve this problem resources beyond Earth will need to be acquired. And that will require the development of a viable space transportation infrastructure.

      I've had this efficiency discussion for several years now and the math always leads back to this problem of per capita energy consumption and quality of life. I hope we learn sooner than later that this is part and parcel of technological change and the growth and maturation of civilization itself.

      - kk

    4. CommentedOscar Salazar

      Well, fracking is an example of efficiency improvement, but is still a toxic-intensive chemical assisted technology, that reduces time of extraction but contaminares undergrownd water. The idea is to tackle a problem without creating a new one.

    5. CommentedEdward Ponderer

      One can't but help be reminded of the scene from the musical, Evita, when Eva Peron learns that she has terminal cancer. She turns to Juan and smiles, we can really use this! (politically). In horror his eyes open wide. "Use this?! Don't you understand--you are dying!!"

      The ravage of resources is well-described. So the same "make a buck" attitude is going after "salvaging" the remainder? In other words look good in one positive action in a particular area that cause multi-fold bad to the total system.

      We better get real...

        CommentedAaron Gilbee

        This underlying issue of coordination of resources has been addressed in part by social organizations in more affluent communities, yet normally fades when people don't give the funds to manage the resources. The core ideas here are fairly standard and have different names, such as circularity being as Cradle to Cradle or embedding software as Internet of Things. Good rational and relevant directions presented here.

    6. CommentedZsolt Hermann

      Let us put aside the argument that infinite quantitative growth in a closed and finite natural environment is simply impossible.
      Let us assume this revolution the article is speaking about is happening.
      Does anybody actually stop to think about the question: "Why, What for?!"
      Why do we need ever increasing production, new gadgets released multiple times a year, new fashions, new cars, larger and more of everything and so on?
      Who actually needs all this?
      What is this magical "aggregate demand" we are rushing to satisfy?
      We have been existing in this artificial bubble so long we forgot to ask questions or even wonder why on earth we live our lives the way we do.
      We have been brainwashed so long by "circus and bread", that we take this unnatural and most of the time harmful, unhealthy life for granted as if there was no alternative.
      We all blindly accept we need more energy, more resources, more production and of course even more aggregate demand.
      But again, why, who needs all this?
      Since this is all excessive and unnatural, and at the same time we live in a natural system with very strict laws the bubbles will start bursting (actually they already have).
      So when do we start asking question why we have to live a basically "inhuman", unnatural life in hyper-drive, consuming things we do not need for means we do not have, becoming absolute and desperate slaves in the process?