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How the Best Businesses Boost Profits and Productivity by Cutting Greenhouse Gas Emissions
By Joseph J. Romm
ISLAND PRESSCopyright © 1999 Joseph J. Romm
All rights reserved.
STRATEGIC PLANNING IN THE GREENHOUSE
Imagine a world in which fossil-fuel use has begun a slow, steady decline. More than a third of the market for new electricity generation is supplied from renewable sources. The renewables industry has annual sales of $150 billion, and the fastest growing new source of power is solar energy. An environmentalist's fantasy? No, that's one of two planning scenarios for three to four decades from now, developed by Royal Dutch/Shell Group, the world's largest publicly traded oil company, widely viewed as a benchmark for strategic planning. In this future, average per capita energy consumption nearly doubles by 2060.
Imagine "a rather different world in which new technologies, systems and lifestyles would deliver continuing improvements in energy efficiency so that average per capita consumption rises by only some 15 percent by 2060." A techno-fantasy? No, this is Shell's other energy scenario as described in 1997 by John Jennings, former chairman of the Shell Transport & Trading Group. "Technological advances are enabling increasing energy efficiency in many areas from industrial processes to building construction," cutting primary energy use by up to 60 percent in the transportation, industrial, and commercial sector. Shell bases this "dematerialization" scenario on emerging advances ranging from highly fuel-efficient "supercars" to advances in materials, miniaturization, and information technology.
Whether through cool power or energy efficiency, Royal Dutch/Shell Group, the best predictor in the energy business, anticipates a cool future for the world. It is betting hundreds of millions of dollars on its scenarios by expanding its renewable energy division. At the same time, the company is dramatically reducing its own greenhouse gas emissions. Shell projects it will reduce its total greenhouse gas emissions from the equivalent of 140 million tons of carbon dioxide in 1990 to 100 million tons or less in 2002.
The key strategic planning question for any company is: How can we thrive in an uncertain future? The version of that question considered on these pages: What should we do if our core business is likely to be affected by growing concern over global warming? We will learn how big companies like Toyota, DuPont, Interface, and General Motors, as well as small ones, are changing their products and processes because of environmental considerations, including global warming. I begin with a company whose primary product—oil—is a leading cause of global warming: Royal Dutch/Shell. Shell is reinventing itself using its much admired approach to strategic planning. As you seek to help your own company change, you will find few better models than the process pioneered by Shell.
THE PLANNERS OF ROYAL DUTCH/SHELL
Throughout the 1990s, Royal Dutch/Shell has found itself leading the list of the world's most profitable companies, thanks in large part to its excellence in strategic planning. In 1997, the company had sales of $128 billion, net income of $7.8 billion, and more than 100,000 employees in 132 countries.
Yet, just as the company has reached the top, its future is in jeopardy. On the one hand, the company believes that both global warming and limited supplies of fossil fuels, particularly oil, merit serious attention. On the other hand, the company has been shaken by the public response to its practices in Nigeria and to its plans to dispose of its forty-story Brent Spar oil storage tank. These factors have driven the company's latest efforts at planning, inspiring its top managers to pursue transforming Shell into a "sustainable energy company" While it is easy to be skeptical of such a difficult goal for the world's largest oil company, Shell's track record on turning planning into reality is matched by very, very few companies.
According to the Economist magazine, "The only oil company to anticipate both 1973's oil-price boom and 1986's bust was Royal Dutch/Shell:" Correctly anticipating the future was not the hard part for the Planning Group. One of the developers of Shell's planning process, Pierre Wack, has written, "Surprises in the business environment almost never emerge without warning." Many others foresaw the oil crisis. The hard part was getting Shell's managers to rethink their mental models. Wack saw the same mind-set problems that scientists, for example, must overcome before they break through to novel insights. Wack came to realize that providing new information was not enough, because "novel information, outside the span of managerial expectations, may not penetrate the core of decision makers' minds, where possible futures are rehearsed and judgment exercised."
Wack compares that time to the days prior to the attack on Pearl Harbor, when there was a massive volume of intelligence signals ("noise") coming in. He quotes Roberta Wohlstetter writing in 1962: "To discriminate significant sounds against this background of noise, one has to be listening for something or for one of several things. ... One needs not only an ear but a variety of hypotheses that guide observation." The Japanese commander of the attack, Mitsuo Fuchida, was quite surprised that the attack on Pearl Harbor was a surprise. Prior to the Russo-Japanese War of 1904, the Japanese Navy used a surprise attack to destroy the Russian Pacific fleet at anchor in Port Arthur. Fuchida asked, "Had these Americans never heard of Port Arthur?"
The approach Wack developed at Shell was "scenario planning," but a type of scenario planning entirely different from that of most companies. Wack did not merely want to quantify uncertainties—i.e., the price of oil may be $20 or $40 per barrel in 2005—because this offers little help to decision makers. Wack wanted to offer managers two or more complete worldviews or scenarios—grounded in a sound analysis of reality. One of these scenarios might be business as usual, while at least one would be a radically different, though plausible, view of the world.
Even though Wack foresaw the energy crisis and presented the results to Shell's management, "no more than a third of Shell's critical decision centers" were acting on the insights gained from the energy crisis scenario. Wack came to realize that although all managers had the new information, most were still processing it through their old paradigm or mental model, what Wack called their "microcosm."
I cannot overemphasize this point: unless the corporate microcosm changes, managerial behavior will not change; the internal compass must be recalibrated....
Our real target was the microcosms of our decision makers: unless we influenced the mental image, the picture of reality held by critical decision makers, our scenarios would be like water on stone....
Wack and his fellow planners realized they "needed to design scenarios so that managers would question their own model of reality and change it when necessary, so as to come up with strategic insights beyond their minds' previous reach." The Planning Group designed a set of scenarios early in 1973 that would force a paradigm shift. Shell managers were presented a business-as-usual scenario. They were also presented the underlying assumptions required for that scenario to hold. Those assumptions were shown to be wholly unrealistic, requiring several "miracles"—each of which was highly improbable—to occur simultaneously. The only way to delay the energy crisis would be the discovery of "new Middle East–sized oil reserves in an area that would have no problem in absorbing revenues" or "seizure and control of producers by consuming countries."
Once managers saw that their faith in the status quo was built on miracles, they were more receptive to new thinking. Wack and his fellow planners led the Shell managers through the process of building a new paradigm, showing them what was likely to happen in the future and what the implications were for the managers' own decisions and actions.
Since oil price increases were inevitable, oil demand would drop. Demand would no longer outpace GNP. Using this scenario, Wack told the refining managers to prepare to become "a low-growth industry."
The planners made clear that the energy shock would have dramatic effects worldwide, but it would affect individual nations differently. The effect would depend on whether a given country was an oil exporter or importer, whether it was free market or centrally planned, and, for importers, how much they relied on imports and how easily they could find alternatives. Therefore, one basic, rigid strategy would not be useful for operating different companies in different parts of the world. Each region would have to respond independently. As a result, Shell would "need to further decentralize the decision-making and strategic process."
Even those managers who remained skeptical at least understood the flaws in their old paradigm and the powerful implications of the new one. When the OPEC oil embargo did occur, and the underlying assumptions of the energy crisis scenario were proven correct, Shell managers were far quicker to shift their behavior accordingly. They slowed down investments in refineries. Their projections of energy demand were consistently lower and more accurate than those of their competitors. They decentralized, while their competitors were becoming more centralized—and hence more inflexible—in a world of rapidly changing events.
Shell rose rapidly from its position as the weakest of the seven largest oil companies in 1970 to one of the two strongest only ten years later. Anticipating the oil bust of the mid-1980s was apparently even more lucrative, helping to put the company atop Fortune magazine's list of the world's most profitable companies in the 1990s.
Shell developed the two scenarios described in this chapter in the mid-1990s. Predicting our energy future over the next few decades is risky, but Shell's track record on predictions is hard to beat. When such a company predicts a fundamental transition from fossil fuels to renewable energy and other advanced energy technologies—one that will have a significant impact on every aspect of our lives—smart executives pay attention.
SCENARIO ONE: SUSTAINED GROWTH (WITH COOL POWER)
The first scenario, which Shell labels "Sustained Growth," entails rapid growth in renewable energy. Here is what Chris Fay, Chairman and CEO of Shell UK Ltd., said in a 1995 speech:
There is clearly a limit to fossil fuel. I showed how Shell analysis suggests that resources and supplies are likely to peak around 2030 before declining slowly.... But what about the growing gap between demand and fossil fuel supplies? Some will obviously be filled by hydroelectric and nuclear power. Far more important will be the contribution of alternative, renewable energy supplies.
Fay presented a detailed analysis of future trends in oil supply and demand, noting that the fossil fuel peak in 2030 would occur at a usage level 50 percent higher than today. Shell's analysis does not rely exclusively on supply limits. After all, people have been worried about such limits for decades. What's significant is that the analysis incorporates the tremendous technological advances that have been made in renewables over the past two decades and that are projected to be made over the next two decades.
These advances in wind power, solar energy, and biomass power (discussed in Chapter 6) have been receiving only modest press attention. They have, however, been sufficient to convince Shell planners that renewables may take over the market for electricity generation in a few decades even if electricity from fossil fuels continues to decline in costs. Their analysis does not assume price hikes in fossil fuels. Nor does Shell assume any attempt by governments to incorporate environmental costs into the price of energy, even though every single independent analysis has found much higher environmental costs for fossil fuel generation than for non-fossil fuel generation. Indeed, the growing consensus on the dangers of global warming, as reflected in the work of the Intergovernmental Panel on Climate Change and in the Kyoto agreement, makes it almost inevitable that carbon dioxide will have a price in most industrialized countries within several years (see Chapter 10).
This scenario is called Sustained Growth because "abundant energy supply is provided at competitive prices, as productivity in supply keeps improving in an open market context." In this scenario, energy consumed per capita worldwide rises steadily, so much so that by 2060 the global average reaches the level Japan has today. Worldwide economic growth of 3 percent per year is achieved through a 1 percent per year improvement in energy intensity (energy per unit GDP) and a 2 percent per year increase in energy production, which increasingly comes from renewable sources.
According to Shell's strategic planning group, the Sustained Growth scenario "can claim to be a genuine 'Business as Usual' scenario, since its energy demand is a continuation of a long historical trend, and the energy is supplied in the way which continues the pattern [of the last 100 years] in which energy forms rise and fall over periods of decades."
Shell's analysis projects the steady and large drops in the price of renewables of the last two decades into the next two decades, as further advances in technology combine with economies of scale as market share grows. For instance, Shell believes that by 2010 commercial energy from biomass (plant matter) could provide 5 percent of the world's power. The value of that power generation would exceed $20 billion. By the mid-2020s, annual sales of wind power plants could exceed $50 billion.
Shell expects photovoltaics (which converts sunlight into electricity), along with emerging highly efficient, low-polluting natural-gas-driven technologies, such as fuel cells (see Chapter 6), to be key drivers of the growth of distributed power systems. Such systems may increasingly be the power source of choice as opposed to the large, expensive, polluting power plants of the past. Just as smaller, more versatile personal computers trumped large mainframe computers or as cellular phones are making the grid of telephone lines obsolescent, distributed sources can obviate the need for huge power lines and other costly elements of a large electric-power grid in developing nations (aside from having superior environmental performance.) The Sustained Growth scenario projects that photovoltaics and other direct conversion of sunlight will be the most rapidly growing form of commercial energy after 2020. Annual sales in 2030 could exceed $100 billion.
This is a "cool power" scenario because it anticipates greatly expanded use of both renewable energy and advanced natural gas technologies. This scenario is tantalizing not only because of Shell's reputation but because it offers the serious possibility that the world could soon realize the dream of nearly pollution-free energy. As we will see, Shell is betting a considerable amount of money on this scenario.
SCENARIO TWO: DEMATERIALIZATION (WITH ENERGY EFFICIENCY)
Shell's second, "Dematerialization," scenario is "driven by convergent and mutually enhancing developments in information technology, telecommunications, materials and biotechnology which in turn could have considerable potential to change social values and with them lifestyles. If this indeed happened, we would experience a transition phenomenon as profound as that brought about by the invention of the automobile and subsequent developments in individual mobility during this century."
Shell planners, for instance, see converging technological developments having a revolutionary impact on transportation. Advances in engines (such as fuel cells), batteries, control system electronics, alternative fuels, and super-strong, light-weight materials lead to the emergence of a super-efficient car. This supercar, together with advances in information technologies that make possible extensive telecommuting, internet shopping, and the like, reduce primary energy use in transportation by 60 percent. New technologies, processes, and materials make possible similarly large savings—60 percent—in the industrial and commercial sectors. To achieve this level of savings would require most companies in the developed world and then in the developing world to adopt the energy-efficiency strategies described in this book.
Excerpted from Cool Companies by Joseph J. Romm. Copyright © 1999 Joseph J. Romm. Excerpted by permission of ISLAND PRESS.
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