Frugal Value: Designing Business for a Crowded Planet

November 17, 2014

NOTE: Images in this archived article have been removed.

Image Removed

The dodo, a flightless bird of Mauritius, became extinct during the mid-late seventeenth century after humans destroyed the forests where the birds made their homes and introduced mammals that ate their eggs. Source: Wikipedia.

Much has already been written on the subject of business growth. But while business manuals explain how to grow your business – how to attract new customers, gain market share, fend off competitors, develop new products and reach new markets – few consider the desirability or indeed feasibility of business growth. To grow is assumed to be the goal of all businesses, and growth is the yardstick by which we measure the success of company executives. Growth seems to have become an end in itself. In this article, I critically examine the notion of business growth in our time, reflecting on the purpose, nature and workings of individual firms in the age of the Anthropocene.

The what? The Anthropocene is a term denoting our new geological era. The Anthropocene is characterized by a wholesale change in our relationship with the natural world. Humans are affecting planetary systems so powerfully that we are changing how they work and the conditions they create. This is the era where human action guides environmental change. Once the preserve of eco warriors, this kind of talk has become mainstream: in 2011, the Economist welcomed its readers to the Anthropocene with a full-page cover and leader entitled This Time it’s Different – but the tone of the article was somewhat at odds with the enormity of its content. We have left behind the geological era, the Holocene, during which human civilization flourished, and entered new, uncertain territory. The most obvious manifestation of the Anthropocene is climate change, recently described by David Cameron as “one of the most serious threats facing our world”[i]; by Barack Obama as the “one issue that will define the contours of this century more dramatically than any other” [ii]; and by Ban Ki-moon as the “defining issue of our age”.[iii] Worse, climate change is only the tip of the melting iceberg. Other related and unwelcome features of the Anthropocene include resource depletion, biodiversity loss, species extinctions, ocean acidification and freshwater scarcity. The Economist was right: this time, it is different.

How did we get here? Uncomfortably, the challenges we now face are largely a product of our global economy. Quite simply, growing economies that require more and more resources to fuel their growth are nonetheless ultimately restricted by the finite planet itself. Our use of natural resources to produce goods and deliver services is bringing the life-supporting planetary ecosystem to its knees. Since the Industrial Revolution, global consumption of resources has skyrocketed. Biomass use has increased fourfold, fossil fuel consumption by a factor of 12, ores and industrial mineral use by a factor of 27, and construction mineral use by a factor of 34.[iv] Globally, we now use between 60 and 70 billon tons of materials per year, or 9.2 tons per capita, eight times more than at the turn of last century.[v] In recent decades, the pace has picked up rapidly, with further dramatic increases since the end of the Second World War and 80% growth in resource use in the past 30 years alone.[vi] While some of this pressure is attributable to population growth – the global population quadrupled last century – the bulk of resource use, especially mineral use, is attributable more specifically to economic development.[vii]

Will resource availability constrain growth? Perhaps not: companies have proven inventive at finding new deposits of sought-after fuels and materials. Yet the extraction, transformation and consumption of resources creates pollution that affects the regulation of the planet’s natural cycles. What may ultimately constrain the use of fossil fuels, for example, is not so much availability but rather limits to how much carbon pollution the planet can soak up. Even the International Energy Agency, not known for its radical environmental agenda, argues that no more than one third of proven reserves of fossil fuels can be consumed by 2050, to keep temperatures within a 2°C rise. In other words, we cannot burn known reserves of fossil fuels, let alone new ones, to have any hope of stabilizing the climate and avoiding the devastating impacts of climate change on water supply, ecosystems, food, coasts and human health. So we’re not so much running out of resources, but out of Planet.

A shame, since it’s where we all live… But we haven’t been destroying our home just for the hell of it: using resources to grow the economy lifts the poor out of poverty, and is behind the material prosperity that enable us to lead comfortable lives in richer countries. We know there is a strong correlation between resource use and prosperity: the bottom 30% of countries with the lowest score on the United Nations’ Human Development Index all consume less than one sixth of the resources per capita consumed in the richest countries. [viii] So we’re left with a bit of a conundrum: economic growth lifts the poor out of poverty and sustains material prosperity, yet relies on the use of declining resources and results in unacceptably dangerous interference with natural systems.  This means one of two things:

1. We can ignore our leaders’ dire warnings, do everything we can to keep the global poor in poverty, continue consuming an outsized share of resources in richer countries, and enjoy our oil-fuelled party while we still can; or

2. We need to figure out how to deliver decent material prosperity for all without the ever-increasing use of resources, which means using fewer resources in rich countries, and more in poorer countries.  

If Option One is more attractive than Option Two, stop reading now. 

Where does business come in? When we talk about the use of resources in the economy, we are actually referring to use of resources by businesses in the course of value creation. Businesses are the actors that convert resources into products ready to sell to their client. It is the production and consumption of products, largely by the private sector and its customers, which have created our ecological mess. Even the service sector is involved – transport, for example, requires fuel, vehicles, and infrastructure. So if we are interested in reducing resource use, this task falls largely on business. Private companies must take the lead in rethinking their products and services, and retooling their operations, business models and structures to help build an economy fit for our Crowded Planet.

So how can businesses respond to the momentous challenges of the Anthropocene? To begin with, the production and consumption of physical objects must change to use fewer resources and create less pollution. Since we need a new type of product, businesses engaged in product design and manufacturing have a key role to play.  Product design affects the whole of a product’s lifecycle, from manufacturing to use and disposal. Consequently, environmental impacts, be they detrimental or beneficial, are also overwhelmingly committed at the design stage. So if designers make “environmental benefit” their goal, we will see a shift in production and consumption toward more sustainable patterns.

What does “environmentally beneficial design” mean? First of all, products must be efficient in their resource use – that is to say, they must use minimal amounts of resources and generate minimal amounts of pollution during their manufacture, use and disposal. Many businesses are already on board with the notion of product efficiency, not least because it can result in cost savings. Current innovative initiatives include ecological design programs such as biomimicry, materials substitution and dematerialization, which is about using the strict minimum of resources for a product to perform effectively.

These interventions are all important, but if we’re trying to consume fewer resources, they are ultimately doomed to failure. Aiming at resource efficiency confronts us with a paradox named for the man who first identified it, Stanley Jevons. In his 1865 book, The Coal Question, Jevons wrote that while one might expect that more efficient use of a resource, in this instance, coal, would decrease its consumption, this was “wholly a confusion of ideas”; “the very contrary”, Jevons wrote, “is the truth”.[ix] While technological progress may support greater resource efficiency, this reduces its cost, encouraging further consumption. The paradoxical effect Jevons observed is pervasive and regularly negates efficiency gains For example energy saving light bulbs may make us less cautious in switching off lights. Perversely, resource efficiency makes us extract, produce and consume more stuff.

To make up for the shortcomings of efficiency, designers must also consider the sufficiency of products: that is to say, they ought to design products that contribute to reducing the number of objects overall. Together, efficiency and sufficiency are about better and fewer products.

While efficiency can quite readily be designed into products, sufficiency is another kettle of fish. Designers can’t just make products that reduce the number of objects overall. However, they can integrate features that support reducing the number of objects. There are two main ways to do this.

The first is by integrating features into product design that make them sharable, thereby enabling multiple users to derive benefit from the same object. Of course, not all products can be shared, but for those that could, a designer should emphasize functionality and technical features that enable sharing – for example, cars in sharing schemes feature membership-card locks, payments through credit cards, and location tracking. Sharing products increases their use-intensity, and it is clear that keeping a product “on the job” rather than sitting idle could enable users to derive product benefits with significantly less stuff in the world.

The second way to make sufficient products is to make them durable, reducing the need for frequent, future replacements. Over three decades, we would need three washing machines with a ten-year lifetime, or one washing machine built to last 30 years. Durability requires choosing the most robust materials possible. But a designer must also encourage customers to use products until the end of their lives. This rarely happens today. In fact, according to one study, two-thirds of appliances are discarded prematurely, sometimes because repairs are prohibitively expensive, but often just because we no longer want them.[x] The latter reflects the fact objects often perform an important cultural function alongside their “real” function. For some objects, the designer could consider how to emphasize product function over aesthetics, for others, the question will be how to create “timeless” design.

Design can create sharable and durable products – that is, products that could be shared and that could be used for a long time. But design alone is not enough. Many companies employ business models that would be substantially disrupted by efficient and sufficient design. Appliance manufacturers, for example, rely on producing and selling high volumes of low cost products. This model drives built-in obsolescence, leading to product proliferation, and is no longer suitable now that we’re running out of Planet. The only way to reduce the number of objects in the world is through business models that drive and require fewer objects.

To create value, companies in the Anthropocene provide efficient products and services, brought to customers through business models that drive product sufficiency. The challenge is to find ways to create value with fewer, better objects. One approach is to replace sales-based models with the “access-based” models of leasing, renting or servicing. A shift towards access-based models would have cascading effects.

First, product manufacturing would shift significantly. Manufacturers today typically create products for ownership by their end-user. This type of manufacturing is most appropriate for products where the benefit from product use is truly dependent on ownership – items such as expensive household furniture, considered an “investment”. [xi] But for many items, whose value can be conveyed by access rather than ownership, resource sufficiency can be supported by a manufacturing strategy that creates objects primarily for long-term leasing to other customer facing businesses. For manufacturers, leasing reverses the problem of in-built obsolescence, as it is now in the interest of the manufacturer-lessor to create durable products, to recoup, refurbish and re-lease. This movement of products between manufacturers and their business customers replaces today’s linear flow of products – from manufacturer to retail to disposal – with more resource-efficient circular flows. The lessee-firms in turn create value by bringing items to end-user clients through their own leasing, renting, or services.

Renting products is hardly new; but social and technological trends suggest that the number and type of items available for rental will increase. Good candidates for renting include all rarely used items; the archetype is the home drill, typically used for only a few minutes each year. For renting or leasing to be truly environmentally beneficial, lessor business must have a long-term stake in the product, a strategy for re-lease to multiple successive customers, and processes for re-manufacturing, re-use and recycling at the end of the product’s life. At the extreme end, renting and leasing themselves may be replaced by services. A printer manufacturer might shift from high volume retail, to leasing and repair, and finally become a printing service: in place of many printers sitting idle in the print rooms of multiple firms, printing might be outsourced to a dedicated printing service.

What all these leasing, rental and service models have in common is that they retain the items used in value creation as assets. Consequently, they have an incentive to keep the most durable products possible, maintain them, and use them until the end of their lives. Moreover, as revenues are generated through product use, the use-intensity of items is maximized. In short, these models drive and require product “sharability” and durability – the two key features for sufficiency of resource use. However, all these models also pose considerable challenges, including the need for physical proximity to clients, and the high cost of labor for any service component.

Businesses in the so-called peer-to-peer economy may also contribute to resource sufficiency, with fewer of the difficulties just mentioned. These businesses work as introduction agencies between buyer and seller, or owner and renter.  Unlike traditional rental models, peer-to-peer businesses do not own any of their assets, thus avoiding costs associated with purchase, maintenance or logistics. Proximity to customers is also less problematic, so long as the two types of customers are themselves in close proximity. With social networking and location-enabled devices, we could imagine many products and services being made available to their user through peer-to-peer rental models: bikes, outdoor sporting goods, apparel, food preparation appliances, gardening equipment, travel accommodation, storage space, and workspace. These models may contribute to product sufficiency in the same way as rental models, through maximizing product use-intensity.

But while these models may contribute to product sufficiency, this is not always the case. Consider the automobile industry: Cars are designed for resource efficiency, and are often leased or rented by businesses or from peers rather than purchased. Servicing and repair shops are common. Taxis replace car ownership by providing the service of mobility. All these models exist and thrive, and yet we don’t have a sustainable automobile industry by any stretch of the imagination.

This problem illustrates the question of optimal scale of sectors – more specifically, the proportion of the “carbon” and indeed “planet budget”, or the share of resources, that should be allocated to different sectors in the interest of sustainability. This is a question for policy makers, but individual firms also need to address the question of their own appropriate scale within their sector.

Appropriate for what, exactly? It depends on what you are trying to achieve. For a company striving to respond to the challenges of the Anthropocene, the appropriate scale is the firm size most conducive to value creation that promotes the efficiency and sufficiency of resource use. A useful way to think about this is to consider what would make a company too big or too small. We could, for example, say a business is too small when resource efficiencies that could be gained from the concentration of production into large-scale units are instead lost to duplication of productive assets and facilities (this is the classic case of economies of scale). At the same time, we could consider a business too large when the capital investment required for economies of scale locks the business into unduly high volumes of production to recoup its investment. This would also lock the firm into a traditional production and sale business models, precluding experimentation with more resource efficient and sufficient access-based models. For businesses with access-based models, a more pressing consideration may be the physical proximity between business and client often necessary for rental and product servicing. If a business becomes too large and too spread out, the environmental impact of logistics, especially transport, may eat up the efficiencies created by the access-based business model.

This question of scale is inextricably linked to the question of business growth: if there is an appropriate scale, it is only desirable for a company to grow to its optimal scale, and not beyond. This is even the case for access-based models, which may initially take market share away from more resource-intensive, sales-based companies, but in time may require more items to lease, rent or use in service delivery, exceeding their optimal scale. The goal of sufficiency is fundamentally in tension with business growth, which requires a growing use of materials, whatever its value creation model. The Anthropocene calls for business to grow purposefully to appropriate scale for resource efficiency and sufficiency, at a scale conducive to human need, and to then stay steady at this optimal scale. This plodding along at a certain size may be anathema to business graduates schooled in “growthism”, and gigantism, but it is nevertheless the strategy required for the Anthropocene. But how would one create an optimally sized firm – and is steadiness actually viable?

Very much so: in fact, the overwhelming majority of businesses are already “steady”. They are small and medium-sized affairs, with no hope and (mostly) no aspiration for global domination. This is quite different to what one encounters in many business textbooks, where firm success is taken to mean private equity investment and a speedy “exit”, ideally through flotation on a prestigious stock market. In fact, the requirements of scale and steadiness need to make us examine the questions of ownership and finance, the building blocks of firm size. The need to increase profit is the main driver of business growth; when profit is understood exclusively as the generation of a quick buck, as is the case when owners are distant from the actual work of the firm, it drives “growth-at-all-cost”, increasing the chances that a company may exceed its optimal size. This is the case for shareholder owned companies, and those held by private equity groups. On the other hand, growth is more likely to be purposeful rather than pursued at all cost in small and medium-sized enterprises, in mission-driven businesses, in firms owned by their members, or when owners are managers. In all these cases, owners are likely to have an interest in the company that goes beyond profit maximization, to include for example a commitment to stewardship of its surrounding and host community, the prioritization of secure and enjoyable livelihoods, or simply passion for the product or service. As distance and diffusion between owner and worker underpins the “growth-at-all costs” company, a business seeking to operate at optimal scale ought to be cautious when raising capital through outside equity, and explore the options of debt and crowd finance.  In any case, the companies that currently dominate the economy in terms of contribution to GDP – public companies and companies owned by private equity groups – have ownership structures inherited from the nineteenth century, which may no longer be fit for purpose in the twenty-first.

This time it is different, and many businesses are already interested in remaking themselves for the Crowded Planet. Faced with ecological devastation, the great challenge of our time is to find ways for us all to live with decent material conditions within planetary limits, now and in the future. In this strange and new environment, the responsible business will pursue both efficiency and sufficiency of resource use. These twin goals have transformative implications – for the nature of products and services, business models, appropriate scale and growth, and ownership and financing arrangements. They require new types of innovation by business, including innovation in technology, structure, organization and relationships. The question for business executives in the Anthropocene is not so much “how can we grow?” but “how can we create a successful business that decreases resource use?” I argue that business can be both successful and responsible by focusing on a new type of value creation, one that has efficiency and sufficiency of resource use at its heart and as its aim, and which I call Frugal Value.

[iv] Krausmann F. et al (2009) Growth in global materials use, GDP and population during the 20th century, Ecological Economics 68 (2009) 2696-2705

[v] Dittrich M. Giljum S., Lutter S., Polzin C. (2012) Green economies around the world? Implications of resource use for development and the environment, Sustainable Europe Research Institute

[vi] idem

[vii] Krausmann F. et al (2009) Growth in global materials use, GDP and population during the 20th century, Ecological Economics 68 (2009) 2696-2705

[viii] Dittrich M. Giljum S., Lutter S., Polzin C. (2012) Green economies around the world? Implications of resource use for development and the environment, Sustainable Europe Research Institute

[ix] Jevons W.S (1865) The Coal Question, An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal Mines

[x] Cooper T. (2005) Slower Consumption, Reflections on Product Life Spans and the “Throwaway Society”, Journal of Industrial Ecology, Volume 9, Number 1-2

[xi]  Public understanding of product lifetimes and durability, research report for the Department for the Environment, Food and Rural Affairs, Lyndhurst, July 2011, Queen’s Printer and Controller of HMSO 2011