First Principle

Building Wealth with Natural Capitalism

by Robert Warren | July 7, 2008

Print

On January 23, 2008 Lee Scott, president and CEO of Wal-Mart Stores, Inc. laid out a remarkable vision for the future in his annual address to Wal-Mart managers.  Drawing on the principles of natural capitalism, Scott empowered his managers and suppliers to provide a leadership role in addressing some of the world's most difficult problems. His vision goes far beyond improving the Wal-Mart stores.  He believes that Wal-Mart must provide leadership to transform the economy, societies, and ecosystems world wide.  He stated, “there are a number of issues facing the world that will profoundly affect our lives and our company. I am talking to you about issues like international trade, climate change, water shortages, social and economic inequities, infrastructure and foreign oil.”

Scott understands that businesses, the economy, society, and the ecosystem, together, face a difficult period with an uncertain outcome. In order to survive and  prosper during “The Crisis Decades,” which I wrote about last week, business must respond and transform their practices.  The Crisis Decades are shown graphically below.

 

Business will be squeezed between rising commodity prices, falling valuation, and less income during the chaos and acceptance periods. Many will simply fail. However, businesses which can reduce waste and increase resource efficiency will survive and prosper. This is because using less energy and other resources to produce the same unit of goods or service will translate directly to the bottom line.

The four principles of natural capitalism are shown below.  The first essay in this series, “Toward a Working Knowledge,” explained these principles in more detail.

1. Dramatic increase in natural resource efficiency.
2. Shift to biologically inspired production modes.
3. Move to a solutions based business model.
4. Reinvest in human and natural capital.

 

In his January 23 speech, Scott articulated each of these principles and showed how Wal-Mart would use these principles to lead the business world and provide solutions for the difficult global problems.  All this, under the umbrella of making a profit, providing customers with a better standard of living, and reducing the impact humans have on the environment.

Here is what Scott said. Compare his statements with the principles of natural capitalism shown above.

1. “Our goal is to work with suppliers to make the most energy intensive products in our stores, anywhere in the world, 25% more energy efficient within three years.”
2. “our goals are to be supplied 100% by renewable energy, to create zero waste, and to sell products that sustain our resources and our environment.”
3. “we will also work on more far reaching change. Many of our supplier factories have multiple customers, including multinational corporations and local retailers. Each retailer often imposes different standards and requires separate inspections. This often results in duplication of efforts without a real improvement in performance. And in some cases, it allows a competitor to have lower standards and, at times, lower costs.
   
   In the next three years, we would like to build a very different system. We believe that there should be one framework of social and environmental standards for all major global retailers. And there should be one third party auditing system for everyone. This will ensure improvement can occur across the board on a level playing field.
   
   The leading global retail and consumer goods network, CIES, is working on this, and we are working with them and a number of global retailers to achieve this vision. The effort is now focused on social standards, and I believe it should be expanded to environmental standards as well. Today I call on all major global retailers to join this effort. I stand ready to meet with the CEOs of our competitors and make socially and environmentally responsible sourcing a reality across the entire retail industry.”
4. “Imagine your customers pulling into your parking lot, and seeing wind turbines and solar panels, and being able to charge their cars while they shop. I think that would make them feel good about shopping at your stores. It would also make them feel good if they could save money in the process. What if we fed the power generated by those wind turbines and solar powers back into the electrical grid? Just imagine the impact of our customers being able to buy eco-friendly energy at the unbeatable Wal-Mart price.”

The first principle, to dramatically increase resource efficiency, is the corner stone of natural capitalism. By itself, the first principle can only increase efficiency approximately four fold. However, coupled with the other three principles working in concert, whole system resource efficiency can increase 100 fold.

Wal-Mart has taken concrete steps to begin implementing the first principle by reducing energy consumption of their truck fleet by 25% in 2008. In the first half of the year, consumption is down by 20%. 25% reduction in Wal-Mart fuel consumption world wide is equivalent to 1% of total US diesel consumption or 10 million barrels of oil a year.
 
This was simply done by cutting out waste and using current proven technology. It was implemented through regular service programs, and procedural changes.  Similar practices implemented across the trucking sector, world wide, could make a significant reduction in crude oil demand immediately.

Further savings will come by redesigning Wal-Mart's truck fleet to use  hybrid technology which, in turn, will place hybrids on the market for others to use. Hybrid technology will double the mileage of a class 8 tractor and Wal-Mart's contribution alone could save another 4% of US diesel consumption or 40 million barrels of oil each year. Here is the press release. “On Jan. 10 /PRNewswire/ -- ArvinMeritor, Inc. and Wal-Mart Transportation, Bentonville, Ark., have agreed to development of a dual-mode, diesel-electric drivetrain for a Class 8 tractor. The vehicle, which is believed to be the first dual-mode diesel-electric tractor prototype in development in North America, will be based on an International Class 8 ProStar tractor and powered by an engine developed by Cummins Inc.” Savings such as this have a huge influence beyond the initial savings. Less fuel needs to come through the  entire supply chain so energy expenditures for each step are conserved.

Scott believes that Wal-Mart should leverage it's influence with suppliers to help increase overall efficiency of the entire consumer product sector. In Scott's words, “We also want to work with our suppliers to help them use less energy too. Working together, we believe our suppliers can reduce the amount of energy they use to make our products by 20%.” He also wants to offer Wal-Mart products that use 25% less energy so as Scott says, “Wal-Mart can help our customers use less energy and spend less on energy. This will also help every country where we operate reduce their dependence on foreign oil.”

The business case for conservation and increasing efficiency is compelling and does not require coercion from governments or environmental groups.  Instead, the profit motive is the motivating factor pure and simple. As a side benefit Scott understands that he is well positioned to leverage Wal-Mart into a significant political and social force, in his words, “Wal-Mart can take a leadership role, get out in front of the future, and make a difference that is good for our business and the world.”

Here is how (WMT) Wal-Mart stock prices stack up against (XLT) an EFT which tracks the S&P retail index for the last two years.

 

               

 

A 25% decrease in consumption is only the first step. On a scale the size of the US economy this level of resource savings can be accomplished by:

1. Cutting out waste through changes in behavior.
2. Implementing energy efficient technologies through regularly scheduled maintenance programs.
3. Rotating in highly energy efficient products as old products wear out.
4. Begin to decrease the size and complexity of infrastructure. Less resource usage in each step of the supply chain would require smaller, less costly, and more efficient infrastructure.

This level of savings for the US translates into 6 million barrels of oil equivalent energy or $870 million dollars per day.  It could be implemented within a few years and indeed has already begun. The down turn in the economy could provide the catalyst to realize this type of savings by the end of the decade.

Further resource savings will be easier to come by as we adjust our expectations toward a more efficient future. For instance, personal vehicles currently only turn about 1% of the energy contained in the fuel into the end use of moving the passenger around. Most of the energy ends up as waste or goes into moving the vehicle.

When redesigning vehicles for a more efficient future, consider taking a whole system engineering approach to the problem. Efficiency is increased by
 

1. reducing the mass,
2. reducing aerodynamic drag,
3. reduce rolling resistance,
4. decreasing manufacturing complexity,
5. decreasing the quantity of natural resources used,
6. increasing power plant efficiency.

Systematic changes can result in a four fold decrease in weight with a stronger more crash resistant exterior.  The frame and metal body can be discarded and replaced with a structural, carbon fiber, molded exterior. The engine and drive train can be replaced by a fuel cell and electric motors mounted directly to the wheels. By making cars more like the way we make airplanes and sports equipment, we could reduce our liquid fuel usage by 75%.

Other sectors can enjoy similar savings. For instance, when designing a new manufacturing plant one bright engineer realized that making two simple changes enabled him to replace 95hp pumps with 7hp pumps.  The changes? He first laid out the pipes so they were straight and short and then placed the equipment. Next he increased the size of the pipes. That 95% decrease in energy usage is an ongoing savings that has the added benefit of reducing capital costs and maintenance.     
 
A future economy that uses 75% less energy would provide the many benefits that are completely out of reach now. Such as:

1. the possibility of US in energy independence,
2. the possibility that renewable could completely run the economy,
3. the possibility that we can solve the worlds most difficult problems, and
4. the possibility that society can make it through the coming crisis years and emerge with a humane and sustainable economic and social model.

It appears that Lee Scott is prepared to change the world, “Wal-Mart is uniquely positioned to succeed not just in this economy, but in these times. And, among retailers, we are the best positioned to lead in the world of tomorrow,” Scott told the audience.

 

Copyright © 2008 Robert Warren
Editorial Archive

contact information

Robert Warren | Email

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.