PATHWAYS TO SUSTAINABLE INDUSTRIAL TRANSFORMATIONS: COOPTIMISING COMPETITIVENESS, EMPLOYMENT, AND ENVIRONMENT* Nicholas Ashford (MIT), Wim Hafkamp (EUR), Frits Prakke, and Philip Vergragt (TUDelft) Introduction The relationship between industrialisation and the effects on the environment has captured the serious attention of national governments and international organisations. In the Netherlands, a successive series of the National Environmental Policy Plans (NEPPs) have been conceived and implemented to guide environmentally sound development. Sustainability in products, processes, and services has been increasingly emphasised by placing environment at the center of some industrial transformations -- or at least on a par with competitiveness. The key to environmental sustainability was recognized early as involving the design and implementation of environmentally sound products, processes and services, rather than addressing environmental concerns as an afterthought in industrial systems. In the current formulation of NEPP 4, important changes from products to productservices and changes in systems, such as for energy, agriculture, and construction are receiving serious attention. Involvement in ‘transition management’ is becoming a central focus of future policy in The Netherlands. At the same time as the environment has become more important in economic policy, European, as well as American, industrial economies have also begun to pay attention to the restructuring of labour markets reflecting changes brought about emerging technologies, such as information & communication technology (ICT) and biotechnology. However, just as thinking about environment after industrial development is planned and implemented does not optimise environmental quality, consideration of labour concerns also requires deliberate and intelligent actions before embarking on industrialisation efforts in guiding industrial transformations. The recent downturn of the extraordinary long economic boom might be expected to reveal fundamental structural employment problems in the industrialised world. It is likely that employment considerations will be the central issue in the coming decade for countries in the expanding European Union, and will influence the nature and direction of (re)industrialisation and the growth of the service economy. It is therefore timely to explore options and opportunities for cooptimising economic development (competitiveness), environmental quality, and labour/employment concerns. The Pathways Project examined three case studies of possible future industrial transformations in which improvements in competitiveness, environment, and employment could be simultaneously achieved. The objectives of the Pathways Project were: (1) to identify, characterize, and evaluate examples of future states (targets for future transformations) of a sustainable world that cooptimise all the public concerns – competitiveness, environment, and employment, and (2) to explore the pathways (transitions) for achieving those future transformations. The research was very much in the spirit of the Dutch notion of ‘backcasting’ in which having identified future desirable transformations endorsed by stakeholders, collaborative experiments, policies and instruments are designed, targeted, and implemented to achieve those transformations. However, because in our research, the future transformations sought to cooptimise three clusters of social concern, the concept of ‘transition management’ was seen to require a related, but different conceptualisation than that used in the context of environmental sustainability. * The research upon which this paper is based was funded by a grant from the Netherlands Ministry of Housing, Spatial Planning, and Environment. Copyright © 2002 by Nicholas A. Ashford. 1 Main Concepts In this research, we argued that it makes quite a difference whether you look at sustainable development as just an environmental issue, or alternatively as a multidimensional challenge in the three dimensions: environmental, economic, and social. Environment, employment, and competitiveness are the operationally-important dimensions of sustainability – and these three dimensions together drive sustainable development along different pathways and go to different places than environmentally-driven concerns alone, which may otherwise require tradeoffs, for example, between environmental improvements and jobs. A sustainable development agenda is, almost by definition, one of systems change. This is not to be confused with an environmental policy agenda, which is – or should be – explicitly effect-based, and derived from that, a program of policies and legislation directed towards environmental improvements, relying on specific goals and conditions. The sustainable development policy agenda focuses at least on processes (e.g., related to manufacturing, transport, energy, construction, etc.), and may extend to more cross cutting technological systems changes. AGENDA Current Competitiveness Improve Performance/Cut Costs Environment Control pollution/make simple substitutions or changes; conserve energy and resources Employment Ensure supply of adequately trained people Sustainable Change nature of meeting market needs through radical or disrupting innovation (a systems change) Prevent pollution through system changes; change resource and energy dependence Radical improvement in human-technology interface (a systems change) Note that current strategy agendas, even those that go beyond environmental goals, are defined as those that are focused on those policies that (1) improve profit and market share by improving performance in current technologies or cutting costs, (2) controlling pollution/making simple substitutions and changes, conserving energy and resources, and (3) ensuring an adequate supply of appropriately skilled labour. We would describe these strategies as ‘reactive’ vis-à-vis technological change, rather than proactive. They are usually pursued separately and by different sets of government ministries and private-sector stakeholders. At best, policies affecting competitiveness, environment, and employment are coordinated, but not integrated. In contrast, sustainable agendas are those policies that are focused on technological changes that alter the ways goods and services are provided, the prevention of pollution and the decreased use of energy and resources through more far-reaching system changes, and the development of novel socio-technical systems -- involving both technological and organisational elements -- that enhance the many dimensions of ‘meaningful employment’ through the integration of policy design and implementation. The kind of innovation likely to be managed successfully by industrial corporations is relevant to the differences between current and sustainable technology agendas. We argue that the needed major product, process, and system transformations may be beyond those that the dominant industries and firms are capable of developing easily, at least by themselves. 2 This argument is centered on the idea of ‘the winds of creative destruction’ developed by Joseph Schumpeter1 in explaining technological advance. The distinction between incremental and radical innovations – be they technological, organisational, institutional, or social – is not simply line drawing along points on a continuum. Incremental innovation generally involves continuous improvements, while radical innovations are discontinuous2 possibly involving displacement of dominant firms and institutions, rather than evolutionary transformations. In contrast, Christensen3 distinguishes continuous imporvements as ‘sustaining innovation’ and uses the term ‘disrupting innovation’ rather than radical innovation, arguing that both sustaining and disrupting innovations can be either incremental or radical. In this work, we adopt Christensen’s terminology. Thus, radical sustaining innovation is a major change in technology along the lines that technology has been changing historically, for example a much more efficient air pollution scrubber -- and is often pioneered by incumbent firms. Major innovation that represents an entirely new approach, even if it synthesizes previously invented artifacts, is termed ‘disrupting;’ and in product markets, it almost always is developed by firms not in the prior markets or business. This is consistent with the important role of ‘outsiders’ – both to existing firms and as new competitors -- in bringing forth new concepts and ideas. Christensen does not develop his ideas for major process or system changes, but, relying more generally on Schumpeter, they are likely to be relevant there as well – with the additional observation that some new alliances of stakeholders may provide an opportunity for process/system changes as well. But caution is advised. Inviting industry to become sustainable by operating in a more modern and enlightened manner can be a viable addition to conventional ideas of governance. But counting only or mainly on existing industries for a sustainable transformation ignores increasing evidence that it is not just willingness and opportunity that is required for such change, but that a third crucial condition -- the ability or capacity of firms to change -- is essential.4 In some situations they may do so because society or market demand sends a strong signal, but not in all or even in most of the cases. We argue here that the same holds true for government and societal institutions faced by the triple challenge emanating from new demands in the areas of competitiveness, environment and employment. Intelligent government policy is an essential part of encouraging appropriate responses of the system under challenge. In addition to the scope of innovation being important, an important allied concept used in our research is that of ‘design space.’ As originally introduced by Tom Allen et al. of MIT, design space is a cognitive concept that refers to the dimensions along which the designers of technical systems concern themselves. Especially in industrial organisations that limit themselves to current or traditional strategies or agendas, there is a one-sided utilisation of the available design space. Solutions to design problems are only sought along traditional engineering lines. In many cases unconventional solutions – which may or may not be hi1 Schumpeter, Joseph. (1939). Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process. New York, McGraw-Hill, as discussed in Niehans, Jurg, “Joseph Schumpeter” in A History of Economic Theory: Classic Contributions 1720-1980. Baltimore: Johns Hopkins University Press, 1990, p. 448. 2 Freeman, Chris (1992) The Economics of Hope, Pinter, London. Christensen, Clayton (2000). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Second edition. Harvard Business School Press 3 4 Ashford, Nicholas (2000). An Innovation-Based Strategy for a Sustainable Environment, in Innovation-Oriented Environmental Regulation: Theoretical Approach and Empirical Analysis, J. Hemmelskamp, K. Rennings, F. Leone (Eds.) ZEW Economic Studies. Springer Verlag, Heidelberg, New York, pp 67-107. 3 tech -- are ignored. For that reason radical, disruptive innovations are often produced by industry mavericks, or as a result of some disruptive outside influence (like significantly new or more stringent environmental regulation and foreign competition, or influence of an outsider to the organisation). In our case studies of potential transformations, we identified such new or neglected avenues of research or design, thereby expanding the available socio-technical design space. In this research we argue that the many dimensions of sustainable futures require consideration of the determinants of competitiveness, environment, and employment. Sustainable transformation processes go beyond the role and responsibility of just a single government department, e.g., environment or economic affairs. System changes cut across problem areas: competitiveness, environment, and employment -- and they therefore also cut across sectors, and government departments and missions. Lessons Learned From The Cases The in-depth study of the three cases undertaken in this research yielded some important lessons for both the operationalisation of cooptimisation strategies and for the possible role of government in implementing a cooptimisation agenda. In the case studies, we focus on those transformations that are neither too small to be interesting, nor too large to be unwieldy in terms of analysis and policy design. The selected transformations as the unit of analysis of our research – and scope of the case studies – were defined or chosen to be large enough to require significant change in the economy, and at the same time be amenable to governmental policy design and intervention. Cooptimisation is a Reasonable Expectation of Deliberate Policy Design On the next page is found a consolidated matrix in which the results from the three cases. What this shows is that, compared to the historical (i.e., present) state of petroleum-based chemical production, land use, and housing construction, it is possible and reasonable, to envision practical transformation scenarios in which there can be a ‘triple dividend,’ so to speak. The value of the cases is found in their persuasive power that a triple dividend is possible in the future, based both on a variety of technical, organisational, and social changes already occurring – albeit in an uncoordinated way – and on reasonable expectations in response to intentional coordination and integration of policy design and implementation. The Nature of the Changes What comes through clearly from the three cases is that they involve system changes going beyond controlling or preventing specific pollution, waste streams, or inefficient resource and energy use. In the Biomass-based Chemistry case, the changes discussed involve a dramatic shift in the nature of materials-based chemistry – from depletables to renewables – and the changes in production processes that would be necessitated by that shift. The most significant improvements to sustainability come from environmental improvements across the board from environmentally-safer production, worker health and safety, and options for improved conditions for employment. In the Multiple Land Use case, we find an employment dividend when compared to what the continuation of the deteriorating situation in rural areas might bring. The most significant improvements to sustainability come from a more robust, revitalized rural economy in which there are diverse uses of land and hence sources of income derived therefrom; a reduction in waste and pollution; efficiency gains in resources and energy; and health/safety, job security, skill enhancement, and job satisfaction for farmers. 4 Flexible Modular Manufactured Housing Biomass-based Chemistry ++ ++ ++ + + + ++ ++ ++ ++ ++ + + + + Multiple Land Use ++ ++ ++ ++ ++ + + ++ ++ ++ ++ + + + ~ ++ + + + ++ ++ ++ + + + ? ++ + 5 Number of Jobs Job Security Purchasing power/ wages (market share) Job Satisfaction psychosocial factors Competitiveness Skill Enhancement creativity of job Environment Lower Cost (derived from environmental or social factors) Lower Cost (inherent) pollution waste production & treatment eco-efficiency TARGETS OF OPPORTUNITY climate change Health and Safety Cases Better performance Biodiversity Consolidated Matrix of Transformations in the Case Studies Employment In the Flexible, Modular Manufactured Housing case, the most significant contributions to sustainability come from enhanced competitiveness, particularly in terms of the quality of the final product of the housing industry due to a shift in the construction industry structure and the relationship among, or characteristics, of the supply-side stakeholders; a reduction in waste and pollution; efficiency gains in resources and energy; and improvements to worker health & safety, job security, skill enhancement, and job satisfaction. What is particularly notable is that while technological advances are needed in some instances (for example, in biomass-based chemistry or flexible modular manufactured housing), the needed organisational, institutional, and social changes may be more significant. In other words, the system changes are multidimensional. This has implications for both the pathways to these transformations and for the design of government policy to facilitate these transformations. Environmental Policy and Sustainable Development: Two Different Agendas In principle, environmental policy can directly evoke relatively simple product or process changes – or it can spur more dramatic changes including system changes – that improve environmental quality and resource/energy efficiency. In practice, however, historical efforts to promote pollution prevention/cleaner production have mostly resulted in housekeeping changes. Notable exceptions – especially in the implementation of the NEPPs – have of course occurred. However, without deliberate design, significant changes – even system changes -- are unlikely to, improve competitiveness, environment, and employment at the same time. The best that might usually be hoped for is the adding on of policies to enhance or mitigate adverse effects in competitiveness or employment. For example, eliminating pollution control in favor of pollution prevention (cleaner production) can improve the environment and also be financially attractive, but this is likely to result in the loss of jobs associated with pollution control and the creation of cleaner production jobs, with a very small net effect on the total number of jobs5. The promise of a significant ‘double divided’ or win-win from environmental policies resulting in simultaneous gains in environmental quality and employment in the EU White Paper has been viewed with great skepticism. Either dislocation of jobs occurs, or the retraining of workers may be necessary. In our cases, industrial transformations may be driven by several factors. Of the three cases studied, we find that the Biomass-based Chemistry case is the one most likely to be driven by environmental concerns. But, worker health and safety also drives the changes. The Multiple Land Use case is likely to be driven more or less equally by environmental concerns and the desire to improve the depressed socio-economic status of rural Holland. The Flexible, Modular Manufactured Housing case is likely to be driven by competitiveness, and to a lesser extent by employment (health and safety) concerns. Environment is not much of a driver, even though we find that the environmental dividend could be quite high, as discussed above. These cases demonstrate that (1) multipurpose design of policy – i.e., cooptimisation -- is necessary to achieve improvements in three dimensions (triple sustainability), (2) 5 Butter, Maurits, and Verheul, Hugo (1999). Cleaner Production; Opportunities for a sustainable economy, TNO-Strategy, Technology and Policy (TNO-STB), 13 August 1999. 6 cooptimisation, rather than single-purpose design, is much more likely to lead to more dramatic system changes (related to ‘opening up the problem space of the engineer/designer’), and (3) therefore, as a practical matter, cooptimisation is likely to achieve greater improvements in any single dimension even than changes resulting from the design and implementation of singlepurpose policies. Part of the success of cooptimisation stems from the fact that policies for competitiveness, environment, and employment are integrated rather than coordinated. The system changes anticipated in the three cases are pervasive, involve many actors – some old, some new – and are ‘disruptive’, rather than ‘radical’, because they either produce products and services with new attributes (Biomass-based Chemistry and Multiple Land Use), new producer stakeholders/alliances are involved (Housing and Multiple Land Use), or production/process methods are significantly altered (Housing and Biomass-based Chemistry). The Dynamics of the Transformation Process/Pathway Having described above the nature of the system changes (i.e., the transformations) in our cases and the importance of pursuing a sustainable development agenda through cooptimisation, we next address what we have learned concerning the pathways by which the needed transformations can be achieved. The Needed Breakthroughs It was mentioned above that the system changes identified in the cases involved technological, organizational, institutional, and social innovations – with the latter three being as, or more important than technological change. This is in line with Christensen who notes that disrupting innovations are technologically straightforward, often consisting of off-the shelf components put together in a [new] product architecture that is often simpler than prior approaches. In the Biomass-based Chemistry case, using biological, rather than chemical or mineral-based starting materials, refineries (factories) must be designed and constructed for producing a variety of newly designed products intended to replace those products currently in use that are objectionable from an environmental or occupational health & safety perspective. In the Multiple Land Use case, the ‘breakthroughs’ involve using the same resource (land) simultaneously for multiple purposes, i.e., replacing the geographically fragmented use of land for separate functions, and technical changes related to the various land-based activities themselves. In the Flexible, Modular Manufactured Housing case, mostly off-the-shelf available materials are used in a new way or for the first time in a different architecture, a different locus, and integrating work tasks heretofore fragmented and/or uncoordinated. The need for technological breakthroughs in decreasing order of challenge is Biomass-based chemistry > Flexible, Modular Manufactured Housing > Multiple Land Use. As already discussed, the other breakthroughs are of an organizational, institutional, and social nature. From the perspective of organizational change within the industry, the greatest challenge in decreasing order of significance is: Flexible, Modular Manufactured Housing > Multiple Land Use . The incumbent chemicals/mineral-based industries are unlikely to be the innovators, so organisational change within the industry would probably not be pursued; rather Biomass-based chemistry would probably give rise to new firms/entrants and entrepreneurs. On the other hand, new stakeholders and stakeholder coalitions are expected in the Multiple Land Use case. 7 Stakeholders as Drivers In the Biomass-based Chemistry case, the stakeholder drivers are likely to be new firms/entrants and entrepreneurs. In the Multiple Land Use case, existing farmers who are persuaded or might be helped by deliberate government programs could be enthusiastic advocates, but they would have to be solicited as partners. As mentioned above, new stakeholders and new stakeholder coalitions are likely to emerge in both government and the private sector. In the Flexible, Modular Manufactured Housing case, those firms that are part of the current fragmented industries who decide to form critical alliances could be the drivers, but entirely new firms or (new/existing) architectural and design firms who partner with new manufacturing ventures could very well lead the field and drive the changes. Stakeholders who are able to influence the method of operations for the whole chain of constructions might be called “chain integrators.” ICT can lead to new and sufficiently powerful chain integrators, because FFM Housing relies heavily on logistics and logistics are enhanced by ICT. Nature of the Barriers In the Biomass-based Chemistry case, the resistance and conservatism of powerful specialized financial institutions are likely to be important barriers, as are EU agricultural regulations and systems of price supports. Resistance is also likely to be mounted from the incumbent chemicals/mineral-based industries by attempted to capture regulatory systems to their own benefit. In the Multiple Land Use case, unsophisticated and risk-averse farmers are likely to be an important barrier, as is the institutional separation of existing governmental authorities for agriculture, leisure, and recreation. In the Flexible, Modular Manufactured Housing case, the highly cost-competitive incumbent firms are likely to resist the restructuring of the housing construction industry. The difficulty of raising new venture capital is also likely to be an important barrier. Overcoming the Barriers In the Biomass-based Chemistry case, activities that could help overcome the barriers include government or industry research and demonstration projects, favourable tax treatment of investment, and regulatory design and enforcement to disadvantage current chemical/mineralbased chemical production and use. High fossil fuel prices present a window of opportunity for the emergence of new competitive biomass-based products. In the Multiple Land Use case, activities that could help overcome the barriers include the coordination or merger of currently-fragmented regional/local governmental authorities, government infrastructure investment and demonstration projects, and the education of farmers. In the Flexible, Modular Manufactured Housing case, activities that could help overcome the barriers include government or industry demonstration projects; favourable tax treatment of investment; government purchasing of housing units; regulatory design and enforcement to disadvantage current construction practices – including building codes and standards; demolition, recycling, and reconstruction standards -- and the education of owners and workers of architectural, manufacturing, and construction firms. 8 Longer-term Benefits Capacities for risk-taking, learning, and undertaking innovation could be longer-term benefits for those undertaking innovative solutions. In the Biomass-based Chemistry case, it would probably be new firms/entrants and entrepreneurs who would benefit from this transformation and become more inherently innovative beyond the initial transformation. Incumbent firms could, but are unlikely, to change if past responses to regulatory demands are a good predictor of future responses. In the Multiple Land Use case, incentives for continual revitalization of rural areas could result from governmental institutional reorganization at the regional/local level. More risk-taking and learning on the part of farmers could very well result, but more than a one-time intervention would be needed. In the Flexible, Modular Manufactured Housing case, a whole new innovative housing construction sector could be launched, once the initial barriers and resistance to change are overcome, or after incumbent firms who not change exit the market or lose significant market share. The Role for Government Throughout the above discussion, depending on the specific transformation there is a role for government from the direct support of R&D and incentives for innovation through appropriate tax treatment of investment; to the creation and dissemination of knowledge through experimentation and demonstration projects; to the creation of markets through government purchasing; to the removal of perverse incentives of regulations in some instances and the deliberate design and use of regulation to stimulate change in others; to the training of owners, workers, and entrepreneurs, and educating consumers. What the cases illustrate is that the role of government should be considered beyond simply creating a favourable climate for investment. While it is true that ‘the government may not be competent to choose winners,’ it can create winning forces, and provide an enabling and facilitating role by creating visions for sustainable transformations. Conclusions Recalling that a sustainable future requires technological, organisational, institutional, and, and social changes, it is likely that an evolutionary pathway is insufficient for achieving factor ten or greater improvements in eco- and energy-efficiency and reductions in the production and use of, and exposure to, toxic substances. Such improvements require more systemic, multidimensional, and disruptive changes. We have already asserted that the capacity to change can be the limiting factor -- this is often a crucial missing factor in optimistic scenarios. Such significant industrial transformations occur less often from dominant technology firms, or in the case of unsustainable practices, problem firms' capacity-enhancing strategies, than from new firms that displace existing products, processes and technologies. This can be seen in examples of significant technological innovations over the last fifty years including transistors, computers, and PCB replacements. Successful management of disruptive product innovation requires initiatives from outsiders to produce the expansion of the design space that limits the dominant technology firms. Especially 9 in sectors with an important public or collective involvement like construction and agriculture, this means that intelligent government policies are required to bring about necessary change. Rigid industries whose processes have remained stagnant also face considerable difficulties in becoming significantly more sustainable. Shifts from products to 'product services' rely on changes in the use, location, and ownership of products in which mature product manufacturers may participate, but this requires significant changes involving both managerial and social (customer) innovations. Changes in socio-technical 'systems', such as transportation or agriculture are even more difficult. This suggests that the creative use of government intervention is a more promising strategic approach for achieving sustainable industrial transformations, than the reliance of the more neo-liberal policies relying on firms' more shortterm economic self-interest. This is not to say that enhanced analytic and technical capabilities on the part of firms; cooperative efforts and improved communication with suppliers, customers, workers, other industries, and environmental/consumer/community groups are not valuable adjuncts in the transformation process. But in most cases these means and strategies are unlikely to be sufficient by themselves for significant transformations, and they will not work without clear mandated targets to enhance the triple goals of competitiveness, environmental quality, and enhancement of employment/labour concerns. The case studies have served to demonstrate that disruptive innovations are feasible, and they may bring substantial payoffs in terms of triple sustainability. They are within the available, but unused design space. However, the studied cases are only transformations in the making; they are unlikely to occur by themselves. The general environment and incentive structure have to be right for the needed changes to occur. Government has a significant role to play, but the government can not simply serve as a referee or arbiter of existing competing interests, because neither future generations nor future technologies are adequately represented by the existing stakeholders. The Dutch government should work with stakeholders to define far-future targets – but without allowing the agenda to be captured by the incumbents -- and then use its position as trustee to represent the future generations and the future technologies to ‘backcast’ what specific policies are necessary to produce the required technical, organizational, and social transformations. As mentioned earlier, this backcasting will have to be of a next-generation variety of backcasting. It has to go beyond its historical focus on coordinating public and private sector policies. It must be multidimensional and directly address the present fragmentation of governmental functions – not only at the national level, but also between EU, national, regional, and local governmental entities. There is a great deal of ontology, serendipity, and uncertainty in the transformation process, and the long-term prospects may be not be sufficiently definable to suggest obvious pathways or trajectories for the needed transformations. Thus, it may be unreasonable to expect that government can play too definitive a ‘futures making’ role. What follows from this is that rather than attempting tight management of the pathways for the transformations that are sustainable in the broad sense in which we define it in this work, the government role might be better conceived as one of ‘enabling’ or ‘facilitating’ change, while at the some time lending visionary leadership for cooptimising competitiveness, environment, and employment. This means that the various policies must be mutually reinforcing. This newly-conceptualised leadership role – focused on ‘opening up the problem space of the engineer/designer’ -- is likely to require participation of more than one ministry. 10