THE NEXT INDUSTRIAL IMPERATIVE

By PETER SENGE, BRYAN SMITH and NINA KRUSCHWITZ

From Strategy+Business (www.strategy-business.com)

Of all industrial countries, Sweden is probably the farthest along in weaning itself from fossil fuels. Today, the country depends on oil for only 30 percent of its energy, down from 77 percent in 1970. Fifteen percent of all cars sold in Sweden in 2007 can run on ethanol, up from 2 percent in 2000. In 2005, a government-sponsored commission announced its intention to make Sweden the "world's first oil-free economy," starting with an existing "BioFuel Region": an area encompassing 22 municipalities and located on the Gulf of Bothnia, roughly 200 miles north of Stockholm.

One might assume that changes of this magnitude require a massive government effort involving tens of thousands of people, substantial government subsidies, and years of extensively funded research. But until recently, no such support existed. Instead, countless local networks developed quietly, catalyzed by the efforts of small groups of committed and courageous leaders from the public and private sectors.

The Sweden story is a valuable model of what historians call "basic innovation": fundamental changes in technology and organization that create new industries; transform existing ones; and, over time, reshape societies. Basic innovations involve not just a single new technology but a collection of new inventions, practices, distribution networks, businesses and business models, and shifts in personal and organizational thinking that combine to transform the way business is conducted, technology is deployed and people are engaged.

As the implications of global climate change have become clearer, a new wave of basic innovation has begun. These efforts are responses to the same shift of context, in which the prospect of global climate change, in particular, and of growing waste and toxicity and diminishing key resources, in general, has catalyzed a new way of thinking. In this shift, the entire industrial age can now be seen as a kind of extended bubble, showing some of the same dynamics as a financial bubble and being equally unsustainable in the long run.

In financial terms, a bubble is a phenomenon in which the prices of assets outpace the assets' fundamental value. When financial bubbles pop, the same question is always asked: How is it that overexpansion and collapse occurred yet again, drawing in otherwise bright and knowledgeable people?

If a bubble can last for generations, it becomes hard to imagine an alternative to it. But at some point the tensions and inconsistencies between life inside the bubble and the larger reality outside it must be resolved. The bubble cannot expand indefinitely.

The industrial age constitutes an extended bubble of just this sort. Its expansion has continued for more than two centuries, so it is easy to assume that it will continue forever. Its positive impact has been undeniable: Life expectancy in the industrialized world has roughly doubled since the mid-1800s, literacy has jumped from 20 percent to more than 90 percent, and benefits hitherto unimaginable have sprung up in the form of products, services and astounding advances in health, communication, education and entertainment.

But the more harmful side effects of the industrial age have also been apparent from the beginning. They include a host of environmental crises, including increased waste and toxicity, growing stresses on finite natural resources, a loss of community and a commodification of daily life that led to a widening gap between the rich and the poor. No matter how valuable the assets of industrialization may be, their overall costs make the bubble unsustainable.

Global climate change is only one of many side effects of industrial growth, but it has two unique aspects. First, the current and prospective costs are enormous. Second, it provides simple, numerical indicators of just how far out of balance humanity is with nature -- and how rapid and strong the adjustments must be if we are to avert disaster. Climate change can be considered a gift: an alarm clock telling us how rapidly the industrial age is ending.

The alarm clock consists of a wide range of research and computer models, but it can be summed up with a few basic facts. Levels of human-caused carbon dioxide (CO2) emissions -- the primary component of greenhouse gases -- have grown exponentially throughout the industrial age. Today the level of CO2 in the atmosphere is 35 percent higher than at any time in the past half million years.

The current flow of global CO2 emissions is about 8 billion tons of carbon per year worldwide. This is more than 2.5 times the amount -- about 3 billion tons -- that is removed per year from the atmosphere, either absorbed by natural biomass like trees, plants and plankton, or dissolved in oceans.

The difference between "inflows" and "outflows" of CO2 in the atmosphere works like water in a bathtub: So long as the inflow exceeds the outflow, the bathtub continues to fill. At some point, the tub will overflow. CO2 levels will cross a threshold at which the effects of climate change are irreversible and are devastating to humans and other species. The pace of climate changes happening already is leading to a consensus among scientists and some business leaders that catastrophic overflow can be avoided only by rapidly reducing emissions to equal or below the rate at which CO2 is removed from the atmosphere in the next two to three decades. To achieve this will require a 60 to 80 percent reduction of worldwide emissions in 20 years. 

Meeting this 80-20 challenge facing industrial society will require a sea change in the prevailing kinds of energy we use, cars we drive, buildings we live and work in, cities we design, and ways we move both people and goods around the world. Humans must rapidly rethink and rebuild their infrastructure, technology, organizations, and approach to working with nature. The growing recognition of this 80-20 challenge is itself a signal that the industrial age bubble has reached its limits.

Moving beyond the bubble does not mean returning to a pre-industrial way of life. But it does mean making choices that reflect very different beliefs, assumptions and guiding principles. Moving beyond the bubble means learning to live within our "energy income" and relying on forms of energy, such as solar, wind, tidal and plant-based energy, that come from renewable sources. In a post-bubble world, everything must be 100-percent recyclable, remanufacturable, or compostable. There also needs to be a different attitude toward the gap between rich and poor. It is not sustainable for 15 percent of the people to have 85 percent of the wealth. All the institutions of society must accept, as the first responsibility of human beings, the need to leave a healthy global biosphere for future generations.

Learning to live outside the industrial age bubble -- and meeting the 80-20 challenge, in particular -- will require basic innovations of a scale and speed never seen before. Businesspeople can apply their skills in management, entrepreneurship, and economic acumen to galvanize a collective shift.

That was Per Carstedt's contribution. Carstedt was the owner of a large Ford dealership in northern Sweden, a family business founded by his father. After several years of living in Brazil, during which he attended the 1992 Rio Earth Summit, the first global sustainability conference, Carstedt found himself deeply immersed in what he called "big-picture questions." How long could the Industrial Revolution, driven by access to cheap energy, be maintained? Says Carstedt, "I saw the scope and scale of changes that were necessary. But, I asked myself, 'What can one person do?"'

An answer came when a foundation contacted him, wanting help in getting ethanol cars into the Swedish market. "I had driven ethanol cars in Brazil. For me, it was no big deal, but people said they wouldn't work in Sweden. It was too cold. The cars wouldn't start. There were no filling stations. There was no market for them."

After many inquiries, Carstedt found a person at Ford in Detroit who was in charge of a small flexible-fuel vehicle program. "He saw me as a potential ally, and helped (our dealership) buy three cars in 1995." When the cars generated little interest in Sweden, Carstedt persevered. He and a colleague from the Swedish Ethanol Development Foundation (later renamed the BioAlcohol Fuel Foundation) spent the next four years traveling from city to city until they formed a buyers' consortium of 50 municipalities, companies, and individuals committed to buying 3,000 cars.

Along the way he was also getting others engaged -- primarily local government officials -- to help build momentum for his idea. Before long, the BioAlcohol Fuel Foundation was working in concert with scores of individuals and organizations.

By the time the foundation imported the first 50 flexible-fuel vehicles, Carstedt had persuaded only two filling stations to install ethanol pumps. "By 2002, we had 40 stations in the entire country, and in June 2004, we inaugurated the 100th," he says. The number of fueling stations doubled in 2005, doubled again in 2006, and reached 1,000 stations (25 percent of the nation's total) in August 2007.

In the late 1990s, Carstedt set out to find a major auto manufacturer to help develop the next generation of ethanol-based automobiles for Sweden. The vice president of marketing at Saab saw the promise of ethanol as a way to differentiate the company. Saab redirected money from a marketing budget to produce a small number of ethanol cars to test in the Swedish market.

All these initiatives, when combined, created a new fuel industry in Sweden. But Carstedt wanted to address the sustainability challenge more completely, because greenhouse gas emissions from transportation account for only about a quarter of all emissions. Opening a branch of the family car dealership in Umea, a city in northern Sweden, he and an architect, Anders Nyquist, decided to "build the most environmentally friendly car dealership in the world." It would work like a natural system -- recycling wastewater, conserving heat, and being as energy efficient as possible. The idea evolved into what Carstedt and Nyquist dubbed the "Green Zone," a block of businesses that included Carstedt's car dealership, a McDonald's restaurant, and a gas station (selling both gasoline and biofuel). Following the concept of industrial ecology, they designed systems connecting the businesses -- for example, piping excess heat from the restaurant kitchens to the car dealership and the filling station. Overall energy use dropped until it was only 20 percent of that used by comparably sized conventional retail neighborhoods.

To Carstedt's surprise, his small pilot inspired many more. Soon, it started to draw media attention from around the world. After seeing the Green Zone's tangible example, others "could start to take the next steps by themselves," explains Carstedt.

Eventually, the idea of a scaled-up Green Zone -- an entire industrial region free of fossil fuels -- started to take shape. Participants articulated three goals: increasing energy efficiency (producing enough renewable fuel to provide for their energy needs and then some), building a regional industrial base that could provide jobs and business development and pushing the envelope of innovation.

Today, the BioFuel Region initiative in northern Sweden includes more than 200 people working actively for sustainability through student research projects and innovative efforts in local businesses, and in the fields of building and urban design, feedstock development, and ethanol production. Carstedt is also helping coordinate a 25-million-euro global project sponsored by the EU, involving 10 regions seeking to follow in northern Sweden's footsteps.

Other success stories share many characteristics with the Sweden experience. Some, like the Leadership in Energy and Environmental Design (LEED) building certification system, were developed and championed by industry groups (in this case, the United States Green Building Council). Some have been led by companies, others by government agencies. In all cases, people learn to seek allies outside their own organizations. Although the long-term benefits require both courage and the willingness to adapt and learn along the way, the short-term benefits often tend to exceed expectations.

For example, there is significant money to be saved. Companies in all sectors have achieved massive savings from reducing waste and energy usage. General Electric Industrial saved $12.8 million per year just by upgrading the lighting in its plants to its own high-efficiency products.

Just as there is money to be saved, so is there money to be made. As "Fast Company" magazine reported in November 2007, General Mills sells its oat hulls, a Cheerios byproduct, as heating fuel, earning more than it used to spend to dispose of them.

Perhaps most important, the companies that figure out how to escape the bubble early -- how to contribute to an infrastructure or create a product line that embodies ecological principles and cuts greenhouse gases dramatically -- will end up shaping the future of their industries. Toyota, Honda, Sony Europe, GE, Shell and many other companies are reorienting themselves this way. GE initially committed to doubling its R&D investment to $1.5 billion for its suite of Ecomagination technologies, which include wind power turbines, energy-efficient appliances, desalination systems, and low-emission aircraft engines and locomotives. The company has since increased those investments substantially.

All of these examples show that learning to live beyond the bubble can be exciting, profitable, and strategically powerful. However, it is not easy. In many industries, no clear guidelines for change exist. It is up to managers to figure out how to balance the long-range imperatives of technological and operational change with the day-to-day imperatives of short-term business. No one can take on a challenge like this alone, which means that an effort starts with talking to other people -- and often ends there. What seems obvious to one person is far from obvious to another, and one group's urgent necessities present questionable premises for others. Sustainability innovators must learn to foster engaging conversations that build mutual understanding and the ability to work together.

Executives at GE, for instance, started by asking questions about how to expand their various businesses in the long term, a move that was closely tied to the company's traditional emphasis on growth and innovation. After asking current and potential customers about their vision and needs for clean energy and clean water 15 years into the future, they saw that meeting these needs represented significant opportunities for GE. But they found they had limited credibility in selling high-efficiency electric motors, lighting systems, and equipment to customers unless they could answer with a resounding "yes" the question many customers asked: "Are you using these products in your own facilities?" That, in turn, led GE to a wave of rethinking its own processes and practices, new investments, and major remodeling.

We are just beginning to face the 80-20 challenge. Everything that has happened so far to address this issue, all the measures taken around the world, are small compared to what is coming. Many individuals and organizations are leading the way now; many more will follow. And as they coalesce, innovate, and interact, their leadership will shape a world profoundly different from the "takemakewaste" industrial age society.

Peter Senge is a senior lecturer at the Massachusetts Institute of Technology and founding chair of the Society for Organizational Learning (SoL). Bryan Smith is a member of the faculty at York University's Sustainable Enterprise Academy, and the president of the consulting firm Broad Reach Innovations Inc. Nina Kruschwitz is the editor of "Reflections: The SoL Journal on Knowledge, Learning, and Change." This article was adapted from "The Necessary Revolution: How Individuals and Organizations Are Working Together to Create a Sustainable World" (Doubleday, 2008).