Where is the business leadership?

Most industries are facing the competitive challenges of operating in a global market. New products have shorter periods of competitive advantage before becoming commoditized, followed by the inevitable profit pressure. This makes continuous, effective management of all costs strategically essential. Most companies do a pretty solid job of managing material, labor and administrative costs, but surprisingly few can claim to manage energy costs with the same degree of systematic process and attention.Worldwide, about $5 trillion is spent annually on energy. The U.S. alone accounts for about quarter, which represents about 8% of our gross domestic product. In the past five years, we saw increases of 100% or more in the costs of most primary fuels — coal, natural gas and oil — driven by increasing global demand, especially from India and China, along with rising extraction and delivery costs. These hikes in primary fuel costs are reflected in the costs of electricity, gasoline and other refined or converted energy products.In addition, growing public concern over the contribution of energy use to climate change and associated legislative and shareholder pressures are additional reasons for companies to manage energy in a strategically consistent manner.We’re also beginning to see concerns about the ability of the electricity grid to be up to the task of ensuring the reliable supply we’ve become accustomed to, as evidenced by declining power quality and increasing incidence of outages in the U.S. and elsewhere.Given this background, one expects energy management to be very high on the strategic agenda of industrial and commercial management. Is this the case? Maybe not. According to a 2004 survey by The Conference Board, a mere 12% of senior industrial management view energy as a strategic issue; the remainder see it as a predominantly operational issue. This is a surprisingly small percentage given the clear pressures around the long-term cost, supply reliability and potential climate change effects of energy use.It’s even more surprising when we see the gains that some leading companies have achieved from successfully implementing effective ways to manage energy use, cost and supply reliability. Energy productivity gains in excess of 25% in the space of three to five years are not uncommon. Market leaders such as Alcoa, DuPont, Toyota, 3M, BASF and Owens Corning, among others, have well-documented, substantial financial and environmental gains from long-term energy productivity management.As an aside, I always prefer the term “energy productivity,” which indicates the cost of energy for each manufactured unit or service, rather than the more conventional “energy efficiency.” A focus on productivity breaks down traditional boundaries between energy supply and energy use, making managing energy a seamless dialogue among many disciplines within a company, including business and finance.My own experience as a senior manager sponsoring a focused, integrated energy management program at Owens Corning showed me clearly the benefits that can be achieved. Owens Corning uses large amounts of energy to produce fiberglass insulation and composite materials. Starting in 1998, the company embarked on an integrated energy management strategy (then dubbed “Energy: Mission Possible”) to reduce energy cost by 20%, a target actually viewed as all but impossible. By implementing an approach that simultaneously tackled energy procurement, energy efficiency and production technology, we exceeded this target in less than five years, contributing many millions of dollars to our bottom line.The common feature of these success stories is a clear and visible long-term commitment from the highest level of management to the rational use of energy as a prerequisite for market leadership and long-term competitiveness. This commitment is followed closely by accountable leadership for energy productivity on a corporate-wide basis. In these companies, all levels of management have clear energy productivity goals, supported consistently with appropriate leadership and resources.Given the proven business benefits of effective energy management, and the potential risks from failing to do so, we would expect to see senior management tripping over themselves to get engaged. Surveys like The Conference Board’s suggest this isn’t the case. Anyone who goes to a meeting of energy managers will hear a litany of complaints about how senior management doesn’t support effective energy management, budgets aren’t available, and the only strategic approach is to try to get a better discount from the local utility.Exactly why this lack of senior attention is so often the case isn’t always obvious. We’ll explore the variety of sometimes surprising reasons in future columns.