Help please! Pro-sustainability industrial strategy

The world needs to shift to a sustainable footing, and I think industrial strategy is one of the levers to pull. I need your help to run a series of events, publish a paper and make some recommendations to the Green Party of Aotearoa New Zealand. What are the key design questions in formualting an industrial strategy for a sustainable society? What are the current best answers, in practice and in theory? Who knows about them, and how to engage them? What am I missing?

Below I give:
A. Background on why I’m looking at this topic
B. What I am doing
C. A draft framework to populate
D. How you can help

A. Background
A year ago, as I started my sabbatical, I started thinking about what a pro-sustainability innovation strategy would look like. It struck me then that it was a relatively unexplored lever for the shift to a sustainable footing. The reason was obvious: we’d spent decades convincing ourselves that businesses do innovation, and the best role for government was to get out of the way. A friend, James Shaw, asked me to pull something together for the Green Party of Aotearoa New Zealand. He is co-leader and wants to have an economic policy which brings included an innovation policy for sustainability.

I did a bunch of reading, had first thoughts on diagnosis, direction and design of an industrial strategy. As I went further, I realised that writing an innovation policy means working through lots of other stuff: what sort of society are you trying to generate, how do you think the world works and so how do you try to shift it. My sabbatical went down into these, taking time from the specifics of industrial strategy. I went back to Forum, and my time and headspace was taken up.

But now I’ve left Forum and have the time and headspace to come back to it. In the meantime a rather surprising thing happened: the UK voted to leave the EU, and a new Prime Minister created a new department which has ‘industrial strategy’ in the title.

Whatever direction the UK government’s industrial strategy goes, the fact they will have one is a signal of change – one which I want to amplify. For one thing I need to fulfil my promise to James. For another, working through what makes a pro-sustainability industrial strategy will force me to connect my head-in-the-clouds ideas to feet-on-the-ground substance. There’s a chance to contribute to real change happening around the world.

But what do I mean by pro-sustainability industrial strategy? Well, its easy to get in a tangle, with this OECD publication spending 4 pages comparing and contrasting. For now, I’m going to tweak the one they get to in two ways. First, I’m not just thinking of governments, but also cities, companies, civil society organisations and more. Second, I’m making the sustainability component explicit. So, here’s my working definition:

Any type of intervention or policy that attempts to improve the business environment or to alter the structure of economic activity toward sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of such intervention which contributes to putting the world on a sustainable footing.

B. What I’m doing
Obviously, I’m a generalist and there are many people who have been thinking and acting in this area for a while. The part I can play is bringing lots of great stuff together, and making it useable for James and others (without having to get paid – I’m a free resource on this!). I’m doing this as an Associate Fellow of the Centre for Science and Policy (CSaP) in Cambridge – which means I can access that network of academics and policy people.

What I’m planning to do:

  1. Have a draft framework of overarching design questions for formulating a pro-sustainability industrial  strategy and innovation policy. (DONE – see section C. below).
  2. Test and populate that framework (now-April):
    • Interviews with key thinkers and practitioners
    • Desk research
    • Events where people can give their answers to ‘What are the key design questions in formulating a pro-sustainability industrial strategy?’. CSaP has already agreed to run some for their practitioner network in London. I’m exploring having other events with other bodies to reach out to different stakeholders.
    • If I get time, figure out the technology, and if there is demand, I will try to have an electronic way people can populate the framework, wiki-like.
  3. Apply the resulting populated framework to diferent contexts, at least New Zealand but I hope others too (April-May).
  4.  Publish a paper for CSaP on the key design questions in formulating a pro-sustainability industrial strategy (May).
  5. Provide recommendations to James on New Zealand (May).

Simples! Well, not quite. I’d love your help  on who to interview, what to read, whether the framework is robust, what should populate it and who else might want to run an event populating or applying the framework (more specific requests in section D. below).

Also, more fundamentally, there are a bunch of leap-of-faith hypotheses (an idea taken from Eric Ries’ Lean Start Up – review forthcoming):

  • Governments have realized they need an industrial strategy.
  • They are willing to tilt that industrial strategy to sustainable outcomes.
  • There are forms of industrial strategy and innovation policy which can deliver on sustainability goals.
  • There is existing best practice and best thinking to draw together.
  • The people with that best practice or thinking are willing and able to share those with others.
  • It is possible to come up with New Zealand recommendations in London.
  • It is possible to write a generic tool which allows people to locate themselves in their ecosystem, and so come up with context-specific recommendations. And that a framework of ‘key design questions’ can fulfil that need.
  • Looking further ahead, to diffusion, there is a next wave of adoptees, in New Zealand or elsewhere, who would be willing to apply a framework.
  • There are institutions, places and events where the next wave of adoptees  come together to share latest best practice.
  • It is possible to bring the findings to these places.
  • I have the competence, connections and time to bring this all together.

As per Lean Start-up, I will be testing these hypothese as I go. I’ll also have regular ‘Perserve or Pivot?’ moments, to give myself licence to do better things, not just do things better.

C. A draft framework to populate
Below is my first stab at the overarching framework that needs to be populated. I’m seeing it as big questions (e.g. what does sustainability mean in this context?) underneath which there will be a number of sub questions (e.g. which of the Sustainable Development Goals are most applicable?).

Screenshot 2017-01-11 11.50.32.png

D. How you can help
As I say, I see myself as a generalist pulling things together. If it’s already been done – wonderful! I can get on with something else! Please point me in that direction. If it hasn’t been done, then I need help on content and process.

Content

  • For you, what are the key design questions in formualting an industrial strategy for a sustainable society?
  • What are the current best answers, in practice and in theory?
  • How can I improve the framework to populate?

Process

  • Who should I interview?
  • What should I read?
  • Who else might want to run an event populating or applying the framework?
  • How can I test and improve my leap-of-hypotheses?
  • How might I need tp pivot, to do better things not just do things better?

If you thoughts on these, or anything else, just stick them in the comments or contact me via twitter, email or other channels.

Thank you in advance!

NEWS: Inclusive Economy Advisor at the Cabinet Office

Today I started working on a new project – Inclusive Economy Partnership – at the Cabinet Office. I’ll be there for two days a week for the immediate future. I can’t tell you the details (yet) but I can tell you why I’m excited.

An unexpected part of going independent: other people have been suggesting me to organisations who need advice on systemic change toward a sustainable society. Basically, doing my business development for me. Long may that continue!

Giles Bristow did exactly this for me. He was speaking with the Cabinet Office, the government department that supports the UK Prime Minister, and they said they needed a senior body to work in their Business Partnerships team. The project: Inclusive Economy Partnership (rather inevitably, ‘IEP’). Over the last few months I’ve been in conversation with the team. Today is my first day of doing two days a week for the foreseeable future.

Unfortunately I can’t give much in the way of details on the Inclusive Economy Partnership. The ultimate goal is to contribute to the UK being an economy that works for everyone through a multi-stakeholder partnership. There are more details, but I’m afraid you’ll have to wait. What I’m bringing to the party is system change design skills, understanding of business and – frankly – availability. It will take 2 days a week but I’ll still have room for other things.

What I can say is why I said yes, in the context of establishing a portfolio career. In particular, there are three:

  • Be at the vanguard of responding to post-industrial struggles of Western nations. Back in August 2016 I wrote that the UK will now become a testbed in responses to globalisation.  The IEP is a chance to be at the heart of that in the UK. It is about shifting the on-going dynamic of the UK economy. That’s a good outcome to be contribute to of itself, and a great chance to learn about approaches to a cluster of issues which will be increasingly important.
  • Experiment with project methods inspired by ’embracing complexity’. The team here have a core concept (sorry, can’t say more) which I’m helping them fill out and then run. It’s a chance for me to test hypotheses about how to design and run an institutional interventions that evolve our political economy.
  • Experience in government. I’ve worked a lot with business. And this project will use that experience and networks. But it’s an opportunity to be inside government, and see its strengths and struggles.
  • A steady income. In AntiFragile, Taleb talks about having a dumbbell of risks: one hump of low risk activities, and another hump of high risk ones. From an income point of view, this is a low risk activity. It can subsidies the high risk ones, moonshots with small chance of happening but a big impact if they do.

Of course, it could all go wrong. I could do a rubbish job, or get frustrated with how things are done, or the core concept might fall apart as we take it forward. But there’s a chance of making some people’s lives better, and learning about tilting the landscape at the same time. Lots to do! And very excited!

Book review: Alex Evans’ The Myth Gap is brilliant, prompting big questions on how to transition to #sustainability

Alex Evans new book, The Myth Gap, argues that, to address the challenges of sustainability, we need to go beyond technicalities to the very stories we tell ourselves about ourselves. It’s brilliant, urgent, timely. We definitely do need global constellation of myths of a larger us, a longer now and a different ‘good life’ which together shift our collective values base.

But missing for me was the waft and weave of the practice of acting on the ‘myth gap’. How can we learn from experiences of people who’ve already been trying? How else might we generate the stories we reach for to explain the transition we’re facing, especially without requiring a globally agreed assembly of myths or using stories which rely on deadening destinations? 

“People think that stories are shaped by people. In fact, it’s the other way around” Terry Pratchett, quoted approvingly in The Myth Gap.

For the last decade or so, anyone who wants a progressive but clear-sighted view on development and international relations could do worse than read Global Dashboard. One of its founders, Alex Evans, has been an active practitioner in development as a New Labour special advisor to DfID, in international policy setting with as a secondee into UN Secretary General’s office and an academic too. He also co-wrote the super, short think piece ‘Towards a Just and Sustainable Economy’ – one of the best summaries I’ve read.

So I was excited to learn he’d written a book. This review starts by outlining Evans’ arguments, the why, what and how of the myth gap – most of which I basically agree with. But I found that there were more areas to explore, which I cover in the final section.

“On one hand, we’re poised right on the cusp of a genuinely global us – with a global social media network, a global library of knowledge, a global economy, global  governance institutions, a global sense of who we are. On the other hand, we’re also on the verge of an unprecedented  disaster in which we allow climate change – or other areas… – where our technological know-how risks surpassing our ability to use technology wisely….And, while I’m basically optimistic, an extremely bleak outcome is obviously possible…The single factor that will do most to decide how we fare, as we face this test, may ultimately be which stories –  myths –  we reach for to explain the transition we’re facing.

Continue reading

Individuals, stepping out of patterns

Yesterday day I had the fortune of speaking with three people who are agents for a sustainable world. Although I didn’t plan it, and they are all coming from different directions, there is a connection. All three believe that acting so that many individuals can make their own choices is a good thing for the world. Continue reading

Bitesized: role of universities

At a recent event celebrating 50 years of the University of Bath, where I did my Masters, I was on a panel that was asked about role of universities was in the world today. Here’s my answer.
 

Currently we are unsustainable because our natural and social systems are overwhelmed. To be sustainable, we need to be able to adapt as a society faster and ‘larger’ than the challenges we face. As Paul Polman said earlier, we need to evolve our economic model, not just optimise it. Where better than universities to explore and create a pivot in capitalism?

  • We need them to be sites of lifelong learning from action. We can no longer rely on learning all we need in our early 20s and then live off that for the rest of our lives.
  • We need to stop teaching the myth that fiduciary duty is maximising shareholder value. Business Schools have been like Catholic medieval seminaries, sending out priests who believe businesses must maximise shareholder value, and that is good for society. Neither of those two are true. Profit is the fuel for the journey, not the destination.
  • We need to spaces where people can give each other hope in the future. They do that by finding and telling each other stories of a bigger us, a longer now and different good life.*

Universities have a vital role as part of ‘innovation function’ for society, so we can find the form of capitalism where 9 billion people can choose how they live within environmental limits.

* I took these three criteria from a book called The Myth Gap by Alex Evans. I have a review copy, and a post will be combined about it in time for the January launch.

#RedefiningProsperity: Persevere or Pivot?

Last night’s Centre for Understanding Sustainable Prosperity (CUSP) dialogue on Redefining Prosperity forced me to ask: should we presevere with our change strategy to date, or should we pivot to a new approach? The decades of self-declared failure of expert-led change tells me we need to pivot. If you have policy proposals, but no means to have them implemented, then you don’t have a transition roadmap. Let’s use those expert insights in a wider social and political process of imagining a tomorrow which is nourishing for all.

The tragedy of expert-led change
Jorgen Randers is amazing. He was part of the original Club of Rome team who wrote Limits to Growth all the way back in 1972. He’s spent decades using systems approaches to create brilliant insights. We all owe him a deep debt of gratitude for his work and efforts. But he is at the heart of a tragedy for us all.

His most famous work is the original Limits to Growth itself. Graeme Maxton, the current Secretary General of The Club of Rome, pointed out last night two crucial features of that report. First, the trend lines match the ‘main sequence’ prediction made all those years ago – a main sequence which has system collapse from poison of pollution in the 2030-40s.

Second, he emphasised again that they said there is a limit to the growth in the ecological footprint of human civilisation. Too often they were accused of saying there are limits to economic growth. What matters is not the increase in the value of market transactions but the increase in throughput of energy and materials. There’s a limit to how much our one planet can provide as raw materials and – much, much more importantly – absorb as pollution and waste. (We’ll run out of climate before we run out of fossil fuels, for instance.)

Our problem is that the economic growth we have at the moment does indeed also increase the ecological footprint. In principle you might have a growing financial value of activity with a reducing volume of resource use, pollution, waste and emissions. In practice, that’s not the world economy we have. (I’ve discussed this in a previous blog.) Also, Maxton claims the type of economic growth we have now does not reduce inequality or extreme poverty. The latter is controversial. World Bank figures show extreme poverty going down. Maxton’s claim is that, if you add inflation to the extreme poverty threshold then the proportion in the world has gone up.

Then Randers shared his experiences working for decades on policy proposals that would work, if only people put them into practice. He was candid that he had failed. He had proposals that would cost Norwegians – rich Norwegians, who’ve had 2 generations of free education and free healthcare – a mere £150 a year to put the country on a sustainable path. Still, people rejected them.

Randers’ and Maxton’s solution is to come up with better recommendations, ones which do give short-term benefit and politicians should be able to sell, in their new book Reinventing Prosperity. They persevered with their change strategy.

Here are the recommendations, the sustainability transition roadmap for a developed world nation, which they say will cost about 1% of GDP per year for 20 years:

  1. Implement green stimulus packages financed with freshly printed money – pay people to produce a better environment.
  2. Pay workers while they are moving from a dirty to clean jobs – reduce resistance to greener economy.
  3. Pay people who takes care of others at home – reduce burden on public nursing homes.
  4. Restrict trade when needed to protect jobs – keep jobs even if it lowers owners’ profits.
  5. Tax fossil fuel at source, and redistribute the tax money in equal amounts to all citizens – transfer income from those who use lots of fossil fuel to those who use little fossil fuel.
  6. Tax crop and rich – transfer income from rich and poor.
  7. increase inheritance tax – ditto.
  8. Increase pension age – help elderly maintain an income.
  9. Encourage unionisation – increase wages [through greater bargaining power] and reduce owners’ profits.
  10. Shift taxes from income to resource use – reduce tax on work and increase on gasoline and electricity.
  11. Legislate more compulsory vacation – increase leisure, reduce stress, share paid work with more people.
  12. Introduce a guaranteed lovable income from everyone who needs it (below a minimum level) – increase people’s control over their lives.
  13. Pay women to have 1 child or less – increase temptation to have a small family.

Solved, right? Because these do feel like proposals which, if you implemented them, would make a significant difference. Well, not so fast. If you have policy proposals, but no means to have them implemented, then you don’t have a roadmap. You have ideas with nowhere to go.

By persevering, Randers and Maxton have assumed that this is primarily a technical challenge: how can we, as experts, come up with better proposals that others, non-experts, should just accept?

What didn’t occur to them was to speak to the people who kept rejecting the ‘obvious’ policy proposals. It didn’t occur to them that our situation might primarily be a political challenge: how can we, as experts, work with others, non-experts, to create a sustainable future? How can we have a political narrative that gives us all a role in that search?

It didn’t occur to them there might be another way, or that persevering with a failed change model will lead to more failure. Or that acting like technocrats who can just impose solutions actually undermines the trust people have in institutions, and is part of why “people have had enough of experts”. That the way they were acting might be part of the problem.

It didn’t occur to them to pivot. And that is a tragedy for us all.

The audacity of hope
Fortunately the other speaker was former Archbishop of Canterbury Rowan Williams. His perspective was a mediation on the audacity of hope.

For Williams, to prosper is to believe that tomorrow could be nourishing for you and those you care about. Hope is the degree of confidence that I can look forward honestly but without panic. It is not like optimism, re-describing the world in the best possible terms. Instead, Williams’ hope refuses to ignore the world as it is and refuses to accept it must stay the same. This side-steps some of the challenges from Dark Mountain or John Foster’s After Sustainability critique that hope sweeps the bad news under the carpet.

The claim is we need the sense of a tomorrow that’s not empty and not threatening, for ourselves and the lives of others we can imagine. So, for Williams, any project redefining prosperity is a project on imagination: “what sort of imagination do we need in our world today to have hope?”

What if prosperity was about learning how to inhabit our world, including our imaginative world, in tune with the rhythms that are around us, with boundless curiosity and brutal honesty?

Crucial for Williams is imaging others in the future we construct for ourselves, and also imagining with others that future we might share. In this telling, redefining prosperity is a collective, creative act.

He had much more, but this is the flavour. When placed against the decades of failure of an expert-drive technocratic approach, then I hear it as a call to pivot.

As he said, “we are not going to be looked on with gratitude. We are not going to honoured ancestors, the way we are going.” It is our responsibility to change the things with our control – essentially, our way of being and how we try to put change into practice – so we can look our descendants in the eye and say we tried.
It’s not easy to pivot…
Now, I’m not saying it is easy to pivot. Especially when you have spent a lifetime inventing and perfecting specific tools and habits of thought. The Club of Rome is very much in the ‘hard systems’ school: it is possible to perfectly describe a system, and come up with the right solutions. What matters is studying the system. The contrast is with ‘soft systems’ school, which says one’s understanding of the situation depends on your perspective (no perfectly objective God-like view) and any proposed solutions are partial and contingent. What matters is testing your understanding of the system through action with others.

With that background, it’s easy to understand why Randers was tempted to call democracy a stupid approach to decision-making (he didn’t quite say that, he did say “shall we call it stupid?”). Also, one can see why the Chinese government – run, as it is, by engineers – gets Randers approval for just getting on with the right policies.

And I’m also not saying I agree with all that Williams said. His notion of imagining others in our personal future rather begs the question: which ‘others’? Others I am related to? Others I know personally? Others who I culturally identify with (and usually of the same race, nationality and class)? All others today? All others, including those as-yet-unborn?

While I might think it crucial we go for the widest notion of ‘others’, what appeal does that have for someone with a narrow version of ‘others’? Why should they draw their circle of concern (to use Peter Singer’s phrase) as wide as Rowan Williams does, or as wide as I think they should?

…but that’s what’s needed.
What I am saying is that persevering with a technocratic approach hasn’t worked. In a world where people have voted for Brexit and Trump, it’s not good enough to keep on saying they should accept our proposals.

Instead, let’s use those insights in a wider social and political process of imagining a tomorrow which is nourishing for all.

Energy revolution: exponential except for sluggish incumbents

Earlier this week I attended, and was @TheCrowd tweeter, at XEnergy, a half-day conference on the energy revolution organised by The Crowd. I was moderating the roundtable on the Energy Revolution. So, I had a ringside view of what is going on, and how big companies are responding. I can see what’s going on in five categories (see diagram) and how big companies are responding in one word: sluggishly, because they only think in terms of a financial case for marginal efforts. They risk missing out, and we risk more delay in getting to a low carbon world.
 

What’s going on in the energy revolution?

screen-shot-2016-11-23-at-11-03-52
 
The first category of activity in the energy revolution is technologies for energy production and use. At the conference people were getting excited about storage (“less than five years away”). As Michael Liebreich makes clear in this brilliant 2016 Bloomberg New Energy Finance keynote, we have already seen a miracle in renewable energy. Wind costs have fallen 50% since 2009. Solar PV costs have fallen 80% since 2008. This is having consequences. US independent oil and gas producer solvency ratios have deteriorated, with 69 companies under credit ratings review. Coal is in distress. The last 3 years have seen GDP growth with carbon emissions growth. 
 
But more important are digital technologies, that control and match the production and use of energy. By far the most astonishing presentation of the day was from Mustafa Suleyman of Deep Mind, the Ai research company recently bought by Google. Their mantra is “solve intelligence; use it to make the world a better place”. Deep Mind is famous for being the first computer to beat a person at Go, the fiendishly difficult board game. They did this by throwing lots of data at an AI, and then letting that AI learn for itself, not from pre-determined rules about the game ‘Go’.
 
Now here’s the thing about ‘solving intelligence”. If you do that with Go, then you can do that with lots and lots of situations where there is more data than a human mind can cope with. One situation like that is energy management in data centres. These clusters of servers – on which your email, this blog, any internet really – sit consumer around 3% of the world’s energy. Google engineers had been pretty savvy on energy use in Google’s own sever farms. Deep Mind learnt from the data and had novel ideas that added up to an extra 40% of savings.
 
Let that sink in. The best specialist engineers in the world were out by 40%.
What a boon to the world to roll out that problem-solving capability across many, many domains! But. Do you feel safe in your job? If you do, then you either spend all your time doing non-routine things, or your function doesn’t depend on using data – or you’re not paying attention.
 
As well as control, the other critical thing digital technologies can do is match generation and use, on much quicker cycle times and with much greater accuracy. The possibility is of only producing what is needed at the moment it is needed. Which reduces the requirement for spare capacity or base-loads. The vital element here is the interfacing between all the various digital control systems and data. The other thing, of course, is avoiding the rebound effect, where the efficiency gains are wiped out by using the newly-released resources in other impactful ways.
 
No one technology makes up the energy revolution. Instead the potential comes from being able to the combine many, especially the ability to make many interrelated decisions quickly. 
 
A third category are social technologies that underpin the relationships between system actors. We’re very used to generators generating, users using and contracts between the two making sure each party knows what they’re getting. But what if someone has a solar panel on their roof? Sometimes they are a producer, sometimes a consumers. What are the right contractual relations for such a ‘prosumer’?
 
This is what people mean when they say ‘business models are challenged’. The existing relationships no longer fit with what the technologies can do. and the social technologies like contracts that govern those relationships are obsolete. As the value starts to go to those who can match better, then expect to see the rise of more platform business models, that create value by facilitating exchanges between two or more interdependent groups. Will the trade din ata about energy production and use be more valuable than the energy itself?
 
The two remaining categories are physical infrastructure and enabling context. We risk locking ourselves into a grid which is well-suited for the past – a small number of large producers – rather than the future – a large number of small producers. Whatever else one thinks of nuclear and Hinkley C, it risks crowding out the investment needed for a diffuse, dynamic grid. The roundtable participants were full of tales of their staff resisting adopting new technologies, and so the company missing out.
 
 

The sluggish response from big companies

When people talked of their experience in big companies we, inevitably, talked about the business case. People had been successful in getting capex, but often the teeth of opposition. There is lots of baggage that ‘sustainable’ must mean costly. Energy itself is rarely considered a strategic priority: either the cost to the business is too small, or it is assumed to be a given. There’s nothing we can do about it, so let’s comply, be efficient and put our scarce capital behind other ways our company can win.
 
All this reminded me of Clay Christensen’s classic HBR piece: “Innovation Killers: How Financial Tools Destroy Your Capacity to do New Things”. He wasn’t writing about sustainability, but just the lessons of how normal financial decision-making lets companies down. (If you are interested in the business case for sustainability then you must read the full article.) The key insight for energy and big business is this:
 
“The way that fixed and sunk costs are considered when evaluating future investments confers an… advantage on challengers and shackles incumbent firms.”
 
In any NPV calculation you look at the marginal cost and benefit – the extra cash invested to make something new happen and the extra cash back in over time. Everything else is assumed to continue on as before, with fixed costs and the same returns over time. The decision on the investment is treated as only about the new cashflows. It’s not worth including the existing cashflows in the analysis because of an unconscious assumption they will not change. 
 
That’s fine “as long as the capabilities required for yesterday’s success are adequate for tomorrow’s as well”. So, it’s not fine in a period of revolution. If new capabilities are required for future success, then the existing ones are going to become obsolete. The cash spent on maintaining those current capabilities is a waste but, because of the unconscious assumption that things will not change, it does not get included in the marginal investment analysis
 
On the other hand, challengers are looking at the total cashflows in and out. In a period of change, they had the advantage because they are considering how best to use all their resources, not just the marginal part (because most of the budget is already spent in people’s heads on the usual stuff, even before the year begins). 
 
In the HBR article Christensen gives an example of steel mills:
 
“Nucor, the attacker, had no fixed or sunk cost investments on which to do a marginal cost calculation. To Nucor, the full cost was the marginal cost. [A new mill] was the only choice on its menu—and because the IRR was attractive, the decision was simple. USX, [the incumbent] in contrast, had two choices on its menu: It could build a greenfield plant like Nucor’s with a lower average cost per ton or it could utilize more fully its existing facility. 
 
“So what happened? Nucor has continued to improve its process, move upmarket, and gain market share with more efficient continuous strip production capabilities, while USX has relied on the capabilities that had been built to succeed in the past. USX’s strategy to maximize marginal profit, in other words, caused the company not to minimize long-term average costs. As a result, the company is locked into an escalating cycle of commitment to a failing strategy.”
 
Any of that sound familiar? Is your company maximising marginal profit today and so ‘locked into an escalating cycle of commitment to a failing strategy’? Are you sure? Because that’s what I heard behind the stories from people on the roundtables again and again.
 
 

Energy: vital but invisible and interchangeable

Where I have more sympathy with incumbents is on the nature of energy. For the vast, vast majority of customers – whether business or consumers – do not buy something because of the type of energy used to make it. They care about price, quality, convenience and so on. Our modern world is built on the viability of cheap energy, starting with steam for the industrial revolution. But the quality of this blog does not depend on whether the electricity powering my computer is renewable or not (full disclosure: yes, it is renewable, through Good Energy). Energy is vital but invisible and the different sources are – from the end-user’s function point of view – interchangeable.
 
One roundtable member argued that the business case will only come when there is revenue growth, which means making the customer care about the carbon impact of the product they are buying. I cannot say I agree. We’ve had 20 plus years of trying to convince mainstream consumers and businesses that they should care about ‘green’. Quite apart from any ethical concerns on social engineering, it simply hasn’t worked. 
 
In general things get to scale when they are good-enough for the end-user and they are cheap. So, surely the way to drive the energy revolution is to about giving your end-product or service a cost advantage. The operating costs of renewables are part of taking us to a zero marginal cost society. Taking part in the energy revolution means you have cost advantage over your competitors. Use that to reduce the price point and sell more, or make more profit per unit – but use it to win.
 
At the end of Energy, John Elkington gave a typically rousing talk on the need for exponential, following on from the excellent Breakthrough Business Models (full disclosure: I inputted at points and commented on a draft of this report). He had four Ds for everyone’s new year’s resolutions: disrupt; decentralise; democratise; decarbonise. I agree with all four. 
 
What struck me was also that, for companies who use energy but are not in the energy sector, focussing on the energy revolution keeps this all off to one side. To make it strategically relevant, perhaps we need to talking about the wider digital revolution, of which massive changes in the economics of energy is one part.
Otherwise, I fear incumbents will miss out, and our progress to a low carbon world will be delayed.