The 21st century KPIResource Productivity Ory ZikVP of Analytics

5-10-2016

What is the business KPI in a world of scarce resources and what is the role of innovation?

21st century KPIsACT 1: Scarcity and growthThe birth of the sustainability movementACT 2: The skeptic CFOUrgency + No evidence that sustainability worksACT 3: AbundanceInnovation + Connectivity -> resource productivity -> abundance

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What was his KPI? Proteins / calories

#Credit:Orin ZebestCC-BY 2.0

About 30,000 years ago.The caveman left to his day work. He was measuring success by a simple criteria: proteins per calories. He had two advantages: Connectivity InnovationHe did not have to think about the system there was plenty of everythingWe also didnt pay attention to brands

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Why did the sapience win?#

Die ersten Menschen, Weltbild Verlag, 2000. ISBN 3-8289-0741-5

Homo erectusWestflisches Landesmuseum, Herne, GermanyThe Neanderthals were stronger and had larger brainsSapience won because of innovation and connectivity

Using these two advantages: innovation and connectivity sapiens spread1:1 the Neanderthals were stronger. They also had a larger brain. But 20:20 homo sapience won. They won because they had a social structure, they could communicate. They could gossip. The social structure led to more developed language skills that led to more developed ideas that could be communicated. This meant that when there was a coordinated attacks, the sapiens could plan and win. They had innovation and connectivity#

30,000 years later: we dominate the planet #Still two forces: connectivity + innovationNo system thinking

http://geographical.co.uk/places/mapping/item/978-human-worlds

Fast forward 30,000 years we dominate the planet. This Royal Geographical society map shows the infrastructure that we have developed and were population is concentrated. The map shows our dominance. The white lines are the shipping routes. The map is inflated per population on account of less populated areas. We certainly dominate. We have three times more internet cables from the distance to the moon. If we would organize the animals that we eat head to tail we will cover the distance to the moon five times. Still the two driving forces are innovation and connectivity. But now we begin to feel the pressure of a finite system.

two year programme at the Royal Geographical Society,

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Business as usual, we will need three planets#

Source: Global Footprint NetworkOverconsumption, climate change and environmental degradation

Using the global footprint networks heuristic estimation, we currently consume the resources of 1.5 planets and if we continue this way to 2030 we will need 3 planets. Obviously we only have one and the question is how can we get back to one ?

The task of feeding 9 billion people is a huge challenge. It complicated by changing diets (China would like to access to as much proteins per capita as the US), water scarcity, declining soil quality, energy price fluctuation climate change etc. We are good in innovation we have proven that we can find solutions. We are great in connectivity. But we are weak in system thinking

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Brands has leverage#Filmed July 2010 at TEDGlobal 2010Jason Clay: How big brands can help save biodiversity

Jason Clay, WWF at TED 2010Hundreds of companies control 70% of traded commodities between more than a billion suppliers and nearly 7 billion people

This is a slide from WWFs Jason Clay at TED. It turns out that a relatively small number of companies control most of the resources. This is true especially in food. There are a few hundred companies that supply the products of a large number of suppliers. Jason estimates 1.5 billions to billions of consumers. These companies are the big commercial brands

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There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase profits.

Source: university of colorado#Financial vs. Sustainability

..our last, our only chance to reach a destination that assures the preservation of the earth. Source: Kristenbaumlier

So how should businesses respond to the challenge? There are two schools of thought.Two competing forces. They are somewhat represented by two functions. One is the CFO. Think about Milton Friedman: the only social responsibility of a business is to increase profit

The other school of thought is the sustainability "our responsibility is to preserve the earth. Think of it as represented by Rachel Carson. She thinking about the system as a whole. Most people think that preserving the earth is important. The question is who is willing to do what?

So the CFO is Milton Friedman and the CSO is Rachel Carson. Let us see what KPIs they can use that will allow them to live together. The World Economic Forums 2015 list of Top 10 Risks to the global economy in terms of impact included : Water Crises, Climate Change Adaptation, and Biodiversity Loss and Ecosystem Collapse.The CFO is willing to listen but he wants to know the concrete business impacts.

He is thinking about innovation and connectivityShe is thinking about the system

Measuring progress becomes a challenge#

CSOCFO

Oil 400ppmDecember 2015 COP21

Oil at $30 or even $50 and carbon at >400ppmOil is so cheap, why should the CFO care? At $30 per ton of carbon, oil is 30$ for the oil itself and 15$ for the carbon. Oil is so cheap that the barrel itself is half the price of oil (although in most cases oil is not sold in barrels). Oil has not been so cheap for more than a decade. On the other hand greenhouse effect was never so severe? Innovation and connectivity made oil cheap. The system climate change pays a price. These are complex relationship because the CFO understands that there are business risk and yet oil is ridiculously cheap What decisions should be made? How should companies respond?#

How to convince the CFO?#

GrowthValue at risk Capital efficiency Source: cafepress

CFO attention (1-5)

In most organizations the CFO controls the one thing that impacts decisions. budget !Let us measure progress with a very simple Lux take scale: CFO attention. If it is a 1 we will not get anything done. 5 means that Rachel Carson is at least successful in attracting the CFOs attention

For clarity, the CFO would look at three things:Value at riskGrowth opportunities and innovationCapital efficiency

What arguments have been used to convince the CFO to priorities sustainability

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Commodity price inflection point theory 33 commodities equally weightedTheory: all the reduction in a century was erased in a decade due to scarcityPractice: difficult to explain recent decline #Source: GMO

CFO attention1

The first is the inflection point theoryThe CFO is not yet convinced that commodity prices are more important than any other price volatilityFor the CSO commodities are what drive exploitation. For the CFO commodities are another volatile price. The CFO is not yet convinced because there are so many additional factors that determine commodity prices. Instability in the middle east. Economic conditions in China etc. #

Internal price of carbon in leading companies

#The straight line is $125/tonCO2 assuming oil is at $50/barrel and 0.4 tonCO2/barrelIt allows us to see the relative impact of the internal price of carbon on decisions

CFO attention1

The internal price of carbon has more than an order of magnitude variability. The CFO finds it difficult to use as a decision tool

Oil at 50$/barrel 0.4ton/barrel= 125$/barrel#

Not growing as an option Patagonias 2011, New York Times ad: 135 liters of water.. warehouse generated nearly 20 pounds of carbon dioxide.. two-thirds its weight in waste Led to 15% growth ever since

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CFO attention0

Another option that could be considered is not grow since business growth relates to resource consumption. In 2011 Patagonia has a full ad in the NYT asking people to not buy the jacket because of the amount of water that goes into it. The carbon emission and the waste that is generated. Patagonias chairman and owner was genuine when he said that growth isnt central at all, the company had their biggest year ever in 2011 and are growing on average 15% per year ever since. Consumers loved the fact that he cares and bought more Patagonia products.

I believe the accepted model of capitalism that demands endless growth deserves the blame for the destruction of nature and it must be displaced. As such, when it came to Patagonia he added growth isnt central at all, because I am trying to run this company as if its going to be here a hundred years from now. He continued, And if you take where we are today and add 15 percent growth, like public companies need to have for the stock to stay up in value, Id be a multi-trillion dollar company in 40 years, which is impossible, of course.And yet, since making these statements, Chouinards Patagonia has grown more than 15 percent per year and now has annual sales of over a half billion dollars. Notwithstanding Patagonias earned reputation as an environmental leader, even today, the company does not report its greenhouse gas emissions. Why, then, has even Patagonia grown at double digit compound rates, when its Chairman was so critical of growth?The accepted convention that growth is the fount of all good things stands as an abiding sustainability challenge. While the aforementioned technical obstacles of measurement, reporting, standardization, and assurance remain daunting, these issues pale in comparison to the systemic incompatibility of unyielding growth and a finite resource base. The lure of growth and associated economies of scale and are forces that are almost impossible to resist.Thus, a sensible metric or performance indicator for a company like Patagonia and than the entire economic is one that captures business growth on the one hand, and the minimization of resource consumption on the other. Something like resource productivity, defined as business output (nominator) per natural resource input (denominator). Since business output is measured by dollars how then is resource input measured? Companies need a dollar-like measure for resources

has grown more than 15 percent per year and now has annual sales of over a half billion dollars. Notwithstanding Patagonias earned reputation as an environmental leader, even today, the company does not report its greenhouse gas emissions

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More CSR reporting is not leading to more insight

#All inclusive approach: Environmental + Social + GovernanceUnclear business metrics and KPIsData: Incomplete data (granularity) standards, confidentiality, validation

CFO attention1

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http://www.triplepundit.com/2014/07/despite-big-leaps-csr-still-long-way-go/No correlation between sustainability and financial performance Profit CSR score

CFO attention1Challenging to find evidence that convince the CFO that sustainability is core to the business

Bottom line: The CFO is not convinced that sustainability is relevant to what he values (RISK, growth and capital efficiency)

What is the KPI that can bring the CFO and the CSO together? #

CFOCSO?21st century

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Resource decoupling: maximize economic growth per resource use #

http://www.unep.org/resourcepanel/decoupling/files/pdf/decoupling_report_english.pdfReduce the amount of resources used to produce financial growthDevelop a KPI that measures the decoupling

What if we can measure the degree decoupling of economic value to resource use ?Resource use is certainly a risk the CFO will buy-in#

Resource productivity: a KPI that measures resource decouplingResource productivity = $ / Resource useHow do we measure the denominator ?#

time

Economic growth Resource useResource decoupling

timetimeInflection point

2016?

How is it connected to business?#

The most quoted decoupling examples: Innovation, connectivity, and system thinking#

Source: IBM

And when it happens, it is sudden (~2 years)

Remember that we are good at connectivity and innovation but not in system thinking#

Resource Productivity Roadmap Rule #1: avoid value destruction #

Value creation Value destruction

Resource productivity

The offensive (value creation) part is more interesting to the CFO#

Value destruction became crowded lately#

VW lost $33 billion in valuation in less than 2 weeksRecall cost $16 -$18 billionCFO attention at 5 but not for defensive reasons

CFO attention5

Resource Productivity Roadmap: product innovation#

Value creation Value destruction ComplianceProductInnovation

Resource productivity

Low emission

The offensive (value creation) part is more interesting to the CFO#

A Tesla Moment

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CFO attention5

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The Tesla is as green as the electricity charging itTesla is better if charged with low carbon electricity Only 5% buy Tesla for environmental reasonsNearly all buyers would green to be one of the features#

2015,49(22), pp 1369213698

Innovation, connectivity and now system#

Resource Productivity Roadmap#

Value creation Value destruction ComplianceProductInnovationConnectivity

Resource productivity

Low emission15% less navigation errors

The offensive (value creation) part is more interesting to the CFO#

Resource Productivity Roadmap#

Value creation Value destruction ComplianceProductInnovationConnectivity

Resource productivity Business model innovation

Low emission15% less navigation errorsCars off the road

The offensive (value creation) part is more interesting to the CFO#

Resource Productivity Roadmap#

Value creation Value destruction ComplianceProductInnovationConnectivitySystem innovation

Resource productivity Shared and self driving Business model innovation

Low emission15% less navigation errorsCars off the roadLess cars, less errors and low emissions

The offensive (value creation) part is more interesting to the CFO#

Who would reinvent the system?#

Value creation Value destruction ComplianceProductInnovationConnectivitySystem innovation

Resource productivity Shared and self driving Business model innovation

CFO attention5?

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Resource Productivity is VW's bet back as they return to value creation#

?Volkswagens CEO: plans to emphasis digital services and zero-emissions vehiclesThe Telegraph

Still in development

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Rule # 1 avoid value destructionA Chipotle moment #Value creation Value destruction Compliance

Product innovation: A Chobani moment#

CFO attention5

https://prezi.com/qfr_gnwvd8tm/chobani/Greek Yogurt was 4% of the US Yogurt market in 2008. It is 44% in 2013 Chobani was launched in 2009 and led the category ever since

Still in development of the Chobani moment and Chipotle moment

Often when a start-up launches a product, theres an agonizing wait to see if customers will buy it. We didnt have that problem. Within a couple of weeks after Chobani got into ShopRite, we started getting orders for 5,000 cases. The first time we received one, I kept double-checking to make sure it didnt say 500. It quickly became clear that our biggest challenge wasnt going to be selling enough yogurtit was going to be making enough yogurt. https://hbr.org/2013/10/chobanis-founder-on-growing-a-start-up-without-outside-investors

http://www.nytimes.com/2015/05/01/business/chobani-puts-its-ad-money-on-becoming-a-lifestyle-brand.html?action=click&contentCollection=Business%20Day&module=RelatedCoverage&region=Marginalia&pgtype=article

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Where should we look for the next Chobani moment? #

Value creation Value destruction ComplianceResource productivity

ProductInnovation

Alternative proteins

Source for alternative proteins: Lux Research, WhooPea: Plant Sources Are Changing the Protein Landscape

Beyond meat: Impossible food: Hampton Creek: Plant based replacements on conventional foodRaised in the range of hundreds of millions of dollarsThey all rely on the resource productivity ideaThey all have one thing in common: they require scale to succeed. They need to think of the system. Similar to Tesla and the electricity network

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Where should we look for the next Chobani moment? #

Value creation Value destruction ComplianceResource productivity

ProductInnovation

Alternative proteins

ConnectivitySystem innovationBusiness model innovationMostly demand side innovation

Source for alternative proteins: Lux Research, WhooPea: Plant Sources Are Changing the Protein LandscapeSource for food tech: foodtechconnect quoting www.leonmayer.com

Beyond meat: Impossible food: Hampton Creek: Plant based replacements on conventional foodRaised in the range of hundreds of millions of dollarsThey all rely on the resource productivity ideaThey all have one thing in common: they require scale to succeed. They need to think of the system. Similar to Tesla and the electricity network

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The supply side may be as important#

The supply side upstream of the factory, may be as important.#

The supply system may become a global network of plants and growersA connected network of growers. Each plant has a unique IP addressStill needs system thinking: energy, water, land, nitrogenCan it scale using urban water supply?#

Source: OpenAg at MIT media lab

Where will this energy, water, nitrogen and land come from?

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How will farm-servers load the energy and water systems (like server-farms and energy)?Server-farms grew from zero to 5% of the US electricity in two decadesWhat will be the resource demand of farm-servers?What will be the impact on resources: the water-energy-food nexus?Need a systems approach#

Source: National Geographic Source: https://www.pinterest.com/pin/180425528796565157/ Server farmFarm server

Shift from energ to enerrgy and waterHow much water will be required? What is the balance?

A worker tends vegetables at the world's largest "plant factory" on July 2, 2014. The Japanese factory produces 10,000 heads of lettuce a day.Shigeharu Shimamura, a plant physiologist and CEO ofMirai, has constructed the world's largest indoor farm25,000 square feet of futuristic garden beds nurtured by 17,500 LED lights in a bacteria-free, pesticide-free environment. The result? About 10,000 heads of fresh lettuce harvested each day.

With the conventional method of farming, a lot of water is wasted seeping through the soil as well as evaporating into the air. In an enclosed environment of a factory, we don't lose water down the soil. That is one way.We can also collect the moisture the plant itself emits into the air. The water collected is recycled; this is similar to how our Earth works. The moisture released from living things on Earth collects, forms clouds, and drops back down to Earth as rain. This is the recycling system of our planet. Our factory works just like that. Water is collected, filtered, and recycled in an enclosed space.But it uses utility water not rain. Not even irrigation. We will not be able to scale this without analyzing the system

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Israel Innovation Tour

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4 days, 14 startups, 8am-10pm agendaInnovation in a constrained system

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CaesareaCoal dockDesalination

Caesarea, Israel March 2016Roman Aquaduct

No fresh water Largest power plant in Israel Israels mix 60% coalDesalination 33 million gallons of drinking water per yearWe see the interplay of energy and waterImmediately raises the question of how do we quantify sustainability?If I have a supplier that uses coal and desalinated water is it better than a supplier that uses cleaner energy and freshwater? #

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CaesareaCoal dock

Desalination

1 mile south

Mediterranean water are used to cool the plant. some of the energy is used to desalinate waterLargest power plant in Israel Israels mix 60% coalDesalination 33 million gallons of drinking water per yearWe see the interplay of energy and waterImmediately raises the question of how do we quantify sustainability?If I have a supplier that uses coal and desalinated water is it better than a supplier that uses cleaner energy and freshwater? #

Water scarcity drove system thinking#

Desalination

Pumping

Coal20 kWh/kgal2 kWh/kgal

Water carrierDesalinationDrip irrigation

For Israel, food was value added water

Carbon in your water (coal +desalination)

Solar+pumping

When the lake is full, very little energy is used to pump waterIn times of drought, coal is used to desalinate waterA company in the middle of the country can have more than ten times difference in the carbon footprint of waterThere is no difference in priceIt will also be identical on the sustainability reportToday companies dont go outside the walls of their facilities to ask those questions think GM and FlintThe two key questions that we need to discuss are:Will companies in the 21st century care about where their energy and water comes from?If they do, can they have the information?On their own operation as well as the value chainFor us as a company that focuses on innovation and emerging technologies, it is important to know because if companies care about it, they will need to know what to do about it.#

Food as value-added water

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A crate of oranges ~ cubic meter of waterIsrael focus on high-end low-water crops reduced orange exports

The Water-Energy-Food Nexus has emerged as a key concept to describe the complex and interrelated nature of our global resource systems. It provides a conceptual framework to better understand the interactions between the natural environment and human activities, and to work towards a more coherent approach to natural resources management. The seminar will take a critical look at the "Nexus" and what it adds to cross-sectoral planning and implementation.The seminar is structured in three parts, exploring different approaches, concepts and frameworks to integrated natural resources management. During the first hour, the question of the added-value of the Nexus vis--vis other approaches will be addressed. How does the Nexus help us to understand how water, energy and food are interlinked? Does it just add to the complexity? In the second part, we take a closer look at a different ways of applying Nexus thinking - though an interactive game and a modelling approach. We will discuss how they can be used not only to assess Nexus interlinkages, but also to engage people in the planning and management of resources. We will conclude the seminar with a panel discussion on the added-value of the Water-Energy-Food Nexus.#

The US water pricing system is not built for scarcityThe water pricing is ineffective now. On average 25% water lossesOnce residential, commercial and agricultural water begins to mix, it will require a system change#

CFO attention4

20-30% waste..#

California: running out of cheap water

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The variability in the price of water challenges planningLand, nitrogen, energy and emissions add additional complications The highly variable price and value of water in California

CFO attention4

So what should companies do?

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Resource productivity as a KPI: a systems approach#Model the value chain Identify hotspotsBenchmark resourcesImplement innovation

Meat processingHerd/CalfstageStockergrowthFeedlotfinishingCorn growthWater pumpingSoybeangrowthElectricitySource of flow diagram: Lux Research 2015, De-risking protein strategies using a systems approach

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baselineBeef - conventional

baselineBeef - grass fed

baselineSwine

baselinePoultry

baselineSalmon - net pen

baselineSalmon - marine bag

baselineTuna

baselineDairy

baselineEggs

baselineSoybean meal

baselineCanola meal

baselinePea meal

baselineAlgae

baselineCricket meal* Normalized by protein content and PDCAASThe resource productivity of animal, fish, plant and alternative proteins

Establish a baseline for strategic decisionsWWF project

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9%56%5%Resource productivity of crickets as percentage of beef per unit of digestible proteinSignificant energy consumptionNegligible agricultural water, land use and nutrient load

On average crickets as a protein source will save 90% of the GHG emission, about half the energy required and 95% of water (normalized for protein content)

choices if oceans grow too acidic, for example, shrimp and lobsters may be unable to form their tough shells. If soils are too degraded to fend off patho-gens, favourites like the Cavendish banana the most widely eaten banana family can suffer sudden extinction.Thats why part of the innovation in food comes in stretching the bounda-ries of our global eating habits. And that means bugs, lots of bugs. Of course, some populations have traditionally eaten bugs (the scientific term for bug eating is entomophagy), but in the western world theres something of an

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Optimize ingredient composition within food development

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The impact of various ingredients assuming equal mass As we optimize health, safety, cost food developers will be able to optimize resource productivity per ingredient

Not a piece of food that one would like to tryAs we optimize health, safety, costCompanies will be able to optimize resource productivity #

The winner in food will deploy system level innovation#

Value creation Value destruction ComplianceProductInnovationResource productivity

ConnectivitySystem innovationBusiness model innovation

CFO attention5

Many attempts: food to market etc. #

Analyzing consumption hotspots and mapping replacements#Model the value chain Identify hotspotsBenchmark resourcesImplement innovation

Identify water intensive suppliers in water scarce areas

Offer drip irrigation

CFO attention5

Resource Productivity #

More Chobani moments are coming based on innovation and connectivityThe overlooked opportunity is system thinking on energy, water and land The first step is resource productivity as a KPI

Thank you Ory ZikVP of Analyticsory.zik@luxresearchinc.com+1 617 943 3215

Lux Research Inc. 100 Franklin Street, 8th Floor Boston, MA 02110 USA Phone: +1 617 502 5300 Fax: +1 617 502 5301 www.luxresearchinc.com