By Stefan Heck and Matt Rogers
We are standing at the threshold of the biggest business opportunity in a century.
That’s the surprising conclusion we came to in 2006, after years of working as counselors to some of the world’s leading technology, industrial, and energy companies.
It was not a popular conclusion at the time. Because of concern about natural resources, conventional wisdom had taken on a “we’re all going to die” tone. The environmental community was certain that pollution and climate change had doomed the planet. Numerous books and published reports argued that copper, iron, and other materials, including the rare earth metals used in so many electronic devices, were on the same “we’re going to run out” trajectory that was projected for oil. The economic community worried about the devastation that could occur when oil hit $200/barrel. Silver at $30/ounce, gold at $1,500/ounce, copper at $3.50/pound, aluminum at $2,000/ton, steel at $900/ton, corn at $6/ bushel, wheat at $7 /bushel- all compounded the fear in the market. Far from being optimistic, many in business wondered: How much could the global economy take?
The surge in wealth in China, India, and other developing countries heightened the worries, because billions of people would soon have the income to consume far more than they ever had before. The world’s population was going to place unprecedented demand on natural resources just as they were petering out.
We had, however, come to different conclusions. Looking at the opportunities that came with adding 2.5 billion people to the middle class and at how the integration of industrial technology and information technology was changing all aspects of resource use, we saw opportunities for transformational changes. Radical improvements in productivity will come to the worlds of energy (both in terms of increasing production and reducing consumption), transport, buildings, water, agriculture, metals, and every other major commodity. These changes matter not just for major commodity producers but for any company that makes heavy use of electricity, fuels, or natural resources or that provides products and services to resource-intensive businesses – in other words, to a high percentage of all the businesses in all the countries of the world.
Rather than facing a crisis because of resource scarcity, we confront an opportunity that will reframe the world’s economy and create opportunities for trillions of dollars in profits.
The next industrial revolution has, in fact, already begun, and it will dwarf the previous industrial revolutions in both size and speed. Managing businesses in this revolution will be hard. Revolutions are always hard. But managers who can adopt the necessary new methods will achieve breakthroughs in efficient use of resources, seize tomorrow’s biggest growth opportunities, and create the companies that lead the global economy for the next century.
Our argument is relatively simple:
• Combining information technology, nanoscale materials science, and detailed understanding of biology with industrial technology and infrastructure yields substantial productivity increases.
• Embedding high-productivity economic growth in the developing world to support the 2.5 billion new members of the middle class presents the largest wealth creation opportunity in a century.
• Capturing these opportunities requires a new approach to management.
We have identified five principles that companies should look at when thinking through how to win the resource revolution. Those principles are:
1. Finding opportunities to substitute away from scarce resources.
2. Eliminating waste throughout the system, from production through end use.
3. Increasing “circularity”- upgrading, reusing, or recycling products.
4. Optimizing efficiency, convenience, safety, and reliability.
5. Moving products, services, and the processes that develop or deliver them out of the physical world and into the virtual realm.
We recognize the challenges ahead. On its current course, the world sees stagnating economic growth, accelerating commodity price inflation, increasing pollution, political gridlock, and the return of the frictions among powerful nations like the United States, China, Russia, India, and Germany.
Accommodating the new members of the middle class will require so much construction that commodity prices will increase and supply chains will be challenged. The increasing rate of change has driven a number of companies into bankruptcy, leading some to believe that we are moving backward, not forward. Pollution levels, especially in the developing world, are reaching choking levels.
Many people, companies, and even nations will try to resist the new industrial revolution. People always resist revolutions. The Luddites tried to kill the first industrial revolution by destroying the steam engines, even though the new machines took Europe out of grinding poverty by delivering productivity that drove unprecedented economic growth. Political gridlock and two world wars tried to kill the second industrial revolution, which eventually defined the dramatic improvements in economic outcomes in the twentieth century.
Doomsayers will always be with us, repeating their dispiriting chant. At the start of the first industrial revolution, Thomas Malthus predicted that the end was nigh. At the end of the nineteenth century, the Royal Society echoed Malthus, even as the second industrial revolution was starting to kick in. Most recently, the Club of Rome issued a dire forecast toward the end of the twentieth century.
From an economic and technological perspective, the doomsayers are wrong. The resource productivity that comes out of this revolution should enable the next 2.5 billion members of the middle class in the developing markets to enjoy the prosperity, the clean air and water, and clean cities that only the OECD countries enjoyed for the last one hundred years-while creating breathtaking economic opportunities for those sharp enough to find them.
Stefan Heck is a former Director of McKinsey & Company who now teaches at Stanford University; Matt Rogers is a Director with McKinsey in San Francisco. Excerpted from Resource Revolution: How to Capture the Biggest Business Opportunity in a Century with permission of Amazon Publishing/New Harvest. ©2014 by Stefan Heck and Matt Rogers. All rights reserved.