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New Bottom Line Volume 5.12 – Tunneling Through the Efficiency "Barrier": The Hits Just Keep on Coming

June 4, 1996

What are the limits of efficiency?

There are physical limits, of course. The laws of thermodynamics tell us that everything runs down, that perpetual motion is out of the question. But our common sense assumptions can take us in some false directions. Ask most people whether you can you have a system that runs forever and
“consumes” no material, and most would say no. But the earth is such a system–with closed material cycles yet open to driving energy flows. And we are hopefully learning how to have companies and economies that function by the same rules.

Applying this thinking to business means there are financial limits to deal with as well. What’s feasible depends on what’s practical, given realities of pricing of equipment, resources, labor and money, and opportunity costs. Yet haven’t seen a company that couldn’t improve. One case in point: a client of ours built a new modern factory to their sense of state of the art; our EcoAudit 18 months later turned up several significant (as well as many minor) opportunities to cut waste and save money–what my wife likes to call “reclaiming lost profits”. They opportunities weren’t missed because the designers weren’t very good–they were–but because technologies evolving rapidly, and because most designers don’t know where to look for interconnections and synergies.

Consider Dow Chemical’s Waste Reduction Always Pays (WRAP) program. Launched in the early 1980s, WRAP challenged employees to propose waste reduction initiatives offering greater than 100% per year return on investment (ROI). The first year, 1982, brought 24 projects that met the standard, with a very satisfying average ROI of 178%. “Great, we’ve got the low hanging fruit,” the managers thought. “But just in case we missed a few things, let’s try it another year or two, to see if there’s any more benefit.” There was, year after year. In 1993 the company adopted 140 employee WRAP recommendations, with an average ROI of 298%! The cumulative record for the program over more than ten years–204% ROI, and annual savings of $110 million.

How was this possible? One reason was that early strategies provided a platform for the next wave of improvements; some options became feasible only after earlier improvements been made. Another is that the work force got smarter; people learned what to look for, spotted opportunities they would have missed without the experience and successes of earlier years. Another, perhaps, is that both employees and managers got increasingly motivated by the profitable payoff from the projects–and the rewards provided to the people who suggested them.

Amory Lovins of Rocky Mountain Institute points to even greater possibilities. Lovins argues that properly sequenced efficiency strategies can repeal the “law” of diminishing returns–the notion that the earliest improvements are most profitable, later ones less profitable and eventually not worth pursuing. The Dow experience suggests this; Lovins is looking at how to design for it. His presentations are filled with counter-intuitive examples of the payoffs from systematic efficiency improvement. One example: the window seals in all those glass-and-steel office buildings have about 20 year life, with countless numbers of them coming due for service in the next decade. The standard approach is simply to replace the seals. Lovins’ approach is to also replace the windows with “super windows”–multi-layered sandwiches of glass, polymer films and inert gases that not only insulated but can be engineered for a wide range of light and heat transmissivity. “Too expensive!” is the standard response. But, Lovins observes, the superwindows not only significantly reduce heating and cooling bills, they reduce heating and cooling loads, so buildings can get by with significantly smaller heating, ventilating and air conditioning systems, which cost significantly less, which savings more than pay for the incremental costs of the superwindows.

This is just one example of what Lovins calls “tunneling through” the efficiency barrier. It may sound suspiciously like a free lunch, but the reasoning is sound; the “subsidy” if any is the enormous inefficiency of the way we’ve always done things. Consider that the estimated thermodynamic efficiency of the US economy is on the order of 2.5%–only half that of Japan and Germany, and perhaps one-tenth of theoretical limits.

“This is the only game in the world,” Lovins quips, “where you can find a hundred dollar bill lying on the floor, bend down to pick it up, and find a 500 dollar bill under it!” How much money is lying around–hidden in plain sight–at your company.

(c) 1996 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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