Thursday, May 1, 2014

Global Warming: Competitive Advantage

Global warming may be real. Or it may be a mis-reading of science, or a figment of Al Gore's imagination, or even an anti-business conspiracy of radical eco-socialists. But whether it is a wake-up call or a false alarm, its net effect for corporate (and especially industrial) enterprise is the same: reducing GHG output reduces costs throughout the fulfillment chain; the resulting savings flow directly to the bottom line.

Some yeards ago, I gave a presentation that outlined progress made by California toward achieving the goals of AB32, the Golden State's "Global Warming Solutions Act." Enacted in 2005, AB32 requires that the state--really meaning its businesses and citizens--reduce aggregated GHG emissions to 1990 levels by 2020. My presentation involved a crazy quilt of policy contortions and self-inflated jargon--low carbon fuel standard, cap and trade, combined heat and power, line loss, renewable energy, megawatt reductions, negawatt increases, parts per million, the Industrial Revolution, battery storage, and lots and lots of acronyms (PPM, LCSF, CHP, RETI, RPS, CTPG, CREZ, CCA, etc and ad nauseum). What that means, practically, I'll address at a later date. For the time being, however, consider the first question I received during the Q&A: "Since man-made Global Warming isn't real, why are we doing all this?"

It's a great question. Though I didn't think so at the time. (What I thought at the time was, "How'd I miss the sign saying: 'American Tea Party: San Francisco Chapter'?".) But in fairly short order, I realized two things: for some audiences, a torturous review of the Precautionary Principle is about as effective as a buggy whip on a bull elephant; second, there is a perfectly cogent, rational and most importantly economically compelling argument that essentially says 'who cares whether Global Warming/Climate Change/methyl klathrates/Al Gore and his 79-room mansion are real?' Because the simple threat of the possibility of total planetary cataclysm gives us a new lens through which to look at the enterprise, providing a rare moment of perfect vision to examine "business as usual", and have its deeply-seated flaws perfectly crystallized for us.

A defining characteristic of Western-style industrial capitalism is inefficient resource utilization to the point of absurdity. Look at virtually any industrial process--from large scale agronomy in which the energy invested on energy returned often reaches a 10-1 ratio, to central station electricity generation which struggles to exceed 50% fuel utilization--and what you find is that the target product is effectively a secondary output. The primary deliverable? Waste. Pundits often get excited about how Congress can't balance a budget, and wonder if elected officials run their household checkbook the same way. But as business people, we can use a similar analogy to illustrate a similar folly: next time you make a home-cooked meal, simply dump most of the pan of lasagna, the tureen of soup or the rack of baby-back ribs right in the garbage. You probably won't do it, and would feel foolish if you did; after all, we're talking about a resource (food) that still has value as nourishment, and would be costly--in terms of both raw input and embedded labor--to replace. Yet, virtually every company that provides any good or service is similarly wasteful--they simply are able to pass the costs through to the end consumer.
So back to the Q&A session for a moment. I had no idea how to respond to the question.  Really none at all.

I wish I had said: "Let's say you are right. Let's posit that global warming is best an errant scientific conclusion and at worst a sinister left-wing hoax. And then let's forget about it entirely and focus instead on what we've learned during the debate--because the possibility of global warming has revealed some fairly stunning realities about how businesses--clearly motivated by short-term profit, but not necessarily by long-term viability--leave a lot of money on the table. So again, forget that you've ever even heard of global warming. Instead, embrace the revelation: how you do business is profligate, to be sure; but in less moral terms, current practices are completely counter to the capitalist mission of optimizing shareholder value, and are instead sending billions of dollars of current and future profit up the stack, out the effluent pipe and into the landfill. And that's just on the output side. think about the cost of raw materials, energy, and human resources."

However, I really needed to conduct quite a bit more research before I could form even a cogent thought on the issue, much less a compelling response.  And as I probed deeper, I discovered something else: in many cases, we are conducting 21st business with 19th century technology and practices. The embedded inefficiency and waste is breathtaking, to be sure. But it is also reckless, destroying shareholder value, and eroding competitive advantage.

How? Well, first let's set aside the warm-and-fuzzy hippy-days drum-beat. Just for a moment, let's look at the situation through the eyes of a cold-hearted capitalist. And look through your most cynical, bottom-dollar glasses: does it make an iota of sense to run a power plant that sends 60% of its energy potential up the stack in the form of waste heat? Are you really optimizing shareholder value when you send a delivery truck out with a 70% load, on under-inflated tires and no wind-skirts? The answers are obvious. So if I'm a business manager, I will swear all the way to the boardroom and back that responding to the threat of Global Warming--even if it isn't "real"--is the right thing to do. (Perhaps especially if it isn't real, and therefore my competitors don't react by re-tooling their systems). My response to the revelations of waste, inefficiency and resource optimization is simple: I'm going to pluck all of those dollars out of my fulfillment stream and pass them on to shareholders.
Perhaps Global Warming is a false alarm. (or a radical left-wing conspiracy, meant to de-rail industrial progress.)  Perhaps it is, as the honorable Senator from Oklahoma avers, "the greatest hoax every perpetrated on the American people." But for a business manager, aren't the lessons you are learning as a proximate result of the threat of climate change a good thing? If a false fire alarm in your building identified very real problems--locked emergency doors, expired fire extinguishers, broken sprinkler systems, flawed evacuation plans--what business wouldn't be grateful for the opportunity the correct those problems? Especially if doing so doesn't merely improve process, it actually identified real savings and opened new profit centers. In short, what if the false alarm revealed a better way of doing things?
That should be the key take-away from the Global Warming dialog: by turning the lens inward, the enterprise can optimize its fulfillment process, reducing waste and lowering costs. In turn, these initiatives create real competitive advantages and improved financial performance.