A new role for natural resource companies

A new role for natural resource companies

[Editor's note: Mary Stacey, this article's lead author, and s+b editor-in-chief Art Kleiner are leading a scenario session based on the premise of this article at the Authentic Leadership in Action (ALIA) institute in Halifax, Nova Scotia, Canada, June 18-23, 2012. For more information, see http://aliainstitute.org/summer2012/.]

Around the world, natural resources companies -- producers of agricultural staples, oil and gas, lumber and wood products, basic chemicals, and many minerals -- are facing unprecedented volatility in supply and demand. The global population is poised to reach 9 billion by 2050, and much of the growth will be in emerging markets.

Millions of people in China, India, Latin America, and Southeast Asia are entering the middle class for the first time, increasing their demand for energy, housing, and transportation. At the same time, because of economic turbulence, rapid technological change, and the ever-present dynamics of gluts and shortages in most resource industries, there is no guarantee that the price of raw materials will continue to rise. Adding to this uncertainty are concerns about the impact this growing demand will have on the environment.

These challenges suggest that we need a new way to think about natural resources -- a shift in mind-set from simply managing resources to practicing resource leadership.

Resource producers have always been constrained by their view that the primary goods they sell are commodities with which they compete on the basis of price alone; their customers determine how they should be used. That approach, however, has led producers to the status quo: a largely reactive position with a short time horizon, and little opportunity to differentiate themselves from competitors.

Resource leadership, in contrast, entails thinking strategically about natural resources from the moment they are pulled from the earth through to their end use. This form of leadership is rare in all too many industries. It involves the ability to see the complex interdependencies of the natural resources system; to engage key stakeholders upstream, downstream, and across sectors; and to promote innovation with economic and ecological benefits within the resource system. Resource leadership thus represents a shift from short-term thinking to stewarding resources for the long term.

Imagine a company that embraced this new model. As a resource producer at the beginning of the value chain, it would contribute solutions and expertise -- culled from working directly with the materials at the earliest stages -- in collaborating with its customers to find cost savings, reduce waste, and improve service.

The expertise developed this way would also lessen the impact on the environment, by helping all users, starting at the source, operate more effectively, with less waste.

To succeed, resource leadership requires a partnership-oriented model, in which the producers and consumers of raw materials have a mutual interest in process and product innovation. The producer helps the consumer identify cost savings and access technological innovations throughout the value chain, and as a result can charge slightly higher prices without feeling vulnerable to lower-priced competitors. A business model with a mutual commitment to the stewardship of resources could work, but only when there is a high enough level of trust between these two groups.

A growing number of companies, both producers and users of natural resources, are recognizing the potential value of this approach. For example, Air Canada, the national Canadian airline, has set out to dramatically improve its performance amid competition from low-cost carriers and pressure from rising fuel costs (its fuel bill in 2011 was more than US$3 billion).

It needs to look for ways to replace or improve legacy practices that hinder profitability. The airline industry may also be faced with carbon taxes linked to emissions limits set by the European Union Emissions Trading Scheme, a multinational cap and trade system for all planes using E.U. airports. The program went into effect January 1, 2012; first payments are due in 2013.

To this end, the company has established a department focused on achieving fuel savings and carbon emissions reductions. Air Canada has recognized that alternative fuels (such as biofuels) can help the airline meet its energy requirements while reducing emissions.

The airline's leaders believe that partnering with alternative fuel producers or suppliers to create economic and environmental solutions could be financially advantageous and reduce the company's exposure to fuel price volatility. A scenario in which the airline industry would be willing to pay a small premium and commit to a significant steady demand for alternative fuels would promote the development of new technologies; reduce the financial burden of carbon taxes; and, in the long term, create a lower-cost, sustainable, reliable, and ecologically friendly solution to the airlines' energy requirements.

Reprinted with permission from the strategy+business website (www.strategy-business.com/article/00106) and the Summer 2012 issue of strategy+business magazine, both published by Booz & Company Inc. Copyright © 2012. All rights reserved.

Airplane wing photo by nikkytok via Shutterstock.