McKinsey’s Matt Rogers on the next industrial revolution

Date: 01-04-2014
Source: Fortune

Rogers’ new book with Stanford Professor Stefan Heck argues that the business world is fast approaching a shortage of valuable natural resources. Here’s what managers need to know.

Matt Rogers of McKinsey & Co.

FORTUNE — Over the next 15 years, another 2.5 billion people in the developing world will join the middle class. China will add 2½ new cities the size of Chicago every year for the foreseeable future and will have 221 cities with over a million in population by 2025 (compared with 35 cities this size in Europe today). That kind of growth is going to create an unprecedented demand for oil, gas, steel, precious metals, water, and other precious resources. If we keep on our current course of consumption, commodity prices, food prices, and pollution levels are likely to spike, greatly increasing risks for business.

In their insightful new book Resource Revolution: How To Capture the Biggest Business Opportunity in a Century McKinsey director Matt Rogers and Stanford Professor Stefan Heck lay out a compelling road map for how managers need to change the way they think about resources if they want to not only survive but also thrive in the 21st Century.

Fortune’s Brian Dumaine caught up with Matt Rogers recently to discuss the book, which will be published on April 1.

The conventional wisdom about resources is that we’re running out, and we’re all going to die. But you believe we’re about to enter what you call a a resource revolution and that it will be the biggest economic opportunity of the 21st century.

Over the next two decades global growth will stress our resources, and that has a lot of people concerned. What gave us confidence to write the book is that we saw that you could combine advances in nanotechnology, materials science, information technology, and biology with traditional industrial technologies and meet resource requirements more easily than most expect.

Can you give us an example?
If we want to conserve our resources, we need to see big jumps in productivity, and that means fundamental changes in the way we make products and work with our customers. We’re talking about 10X productivity improvements. We like to joke that you buy a car in order to park — typically we only use our cars 4% of the time, and half of that time cars sit idle in traffic or looking for parking. This is where new business models like the car sharing service Zipcar, and online taxi companies like Uber and Lyft come into play. They can help increase usage of cars, and that means that we won’t have to build as many cars for an increasing population. You might even say we might hit peak demand for autos at some point. Many of the new generation don’t want to spend a large chunk of capital to own a car.

You also say in the book that another way to save resources is to see equipment as a service.

Yes, GE now sells jet engines by the hour of use. GE owns the engines and does all the servicing. It has sensors on engines today that let them monitor and repair them. The company can keep these engines running longer and better than the airlines can. The operational savings are significant — the airlines don’t have to buy as many planes because the ones they have are in the air longer. GE is starting to do the same thing with medical equipment, and even oilfield equipment.

Isn’t this putting a lot of faith in technology to save us?

The technology is there today. The biggest thing that can go wrong is that management is slow to react to the kinds of change we’re seeing and keeps trying to do things the old way. Not enough executive teams know how to pull this off.

What kind of new management mindset is need?

It starts with the idea that you have to measure your resource productivity. It’s a management measure that almost no company does well today. Most CEOs can tell you about their return on capital employed or output per employee, but almost none of them can tell you about resource productivity.

Then what?

If you’re the CEO you should be asking your folks, How do I improve resource productivity 5 to 10% each year? That’s a high bar. For the last 20 years we’ve improved resource productivity only 1% a year compared to more than 3% for labor productivity. You have to think across your business system and figure out dramatic ways to increase your resource productivity. Ask questions such as, How do you take 80% to 90% of weight and cost out of a product, how do you take commodity price and availability risk out of the supply chain, where are there opportunities to double equipment utilization or cut water use by 80% or cut energy use by 40%?

You argue that the resource revolution will help create decent-paying American jobs, but history teaches us that technology and efficiency can destroy jobs.

Every time we have this kind of major economic transition, a group of people will lose their jobs, but the increase in productivity that comes with an industrial revolution will in the long term foster job and wage growth.

What we have in America today is this very interesting paradox. We have a number of fast-growing job categories where you can’t find enough workers because the candidates don’t have the data-intensive blue collar skills required to operate today’s sophisticated equipment. At the same time, some more traditional industrial jobs are disappearing. It’s a race. Can we create new jobs faster than we destroy them?

What will these new industrial jobs look like?

The kind of economic changes we are talking about tend to push more information and decision authority out to the frontline work force, increasing the value that each frontline employee can deliver.

What we have seen every time, though, is that this shift in the means of production works out. If we don’t have to worry about, say, high oil prices because we’re using our resources more efficiently, companies can and do spend more on highly productive labor. It’s going, however, to take some training for workers to take on these new roles.

Big corporations aren’t known for embracing radical change. What’s it going to take to make them lead a resource revolution? A crisis?

We had a wake-up call in 2007 and 2008 when energy prices spiked. More recently food prices and metals prices are running up. Corporations now see more risk in terms of how resources play a role in their business. Look at China. They’re working like crazy to reduce their vulnerability to environmental exposure and resource price-spikes, while meeting their economic growth targets.

Do you think we’ll make it?

The challenge of this revolution is that it makes managers’ roles change in fundamental ways. I’m optimistic that we can adapt. For the first time entrepreneurs and environmentalists are aligned by common interests: how to do more with less in the face of exploding demand.

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