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PROVOCATIONS

"Playing the Market"

Using Competition to Get Others to Practice What We Preach

by Rocky Mountain Institute

The inventor Paul MacCready once likened Rocky Mountain Institute's Amory Lovins to a grain of sand in an oyster--the irritating catalyst that causes pearls to form.

That's not a bad metaphor for the way RMI operates. Free and fair markets often produce the best pearls; they just need a little sand to get them started. By putting the right information into the right hands at the right time, the Institute stimulates technologies and techniques that work better and cost less. That those pearls also happen to benefit the environment need not concern the oysters.

Effectively harnessed, competition is a powerful, dynamic force for change. By playing this catalyzing role within the private sector, RMI accomplishes far more than it ever could through conventional policy advocacy (or litigation) in the public sector.

Lately, RMI has been applying its catalytic powers to particularly good effect in the fields of automotive design and real-estate development, not only implanting revolutionary ideas but also nurturing them with the right market-making nutrients. Here's how:

 

EARLY ADOPTERS

RMI has always focused its efforts on "early adopters"--corporations and individuals that readily embrace new ideas and in turn introduce them to a wider audience. Key to this strategy, however, is that early adopters must see the prospect of being richly rewarded for acting first. Every early adopter's nightmare is blazing a costly and risky trail, only to be overtaken by late-blooming laggards.

The hypercar, which RMI has been instrumental in promoting for the past five years, is a case in point. Lovins predicts it will bring about the most radical industrial transformation since the microchip. If that's so, a savvy early adopter has a shot at becoming another Intel or Microsoft--and established carmakers will have to move just as fast if they hope to retain market share. Lovins and other RMI staff have given countless executive briefings and presentations and written more than a dozen papers to demonstrate not only the technical feasibility of hypercars but also the financial rewards awaiting those who bring it to market.

To date, about two dozen auto- and parts-makers have launched hypercar development programs, collectively committing an estimated $1 billion. A few, like Swiss-based Esoro, are small design studios or start-ups, free of institutional inertia and unencumbered by huge investments in conventional manufacturing processes. Many are major European and American carmakers, who view hypercar research as a prudent hedge against an uncertain future. Some are aerospace or electronics firms seeking new outlets. RMI supports each company's development efforts on a compartmentalized, non-exclusive basis: it doesn't tell one what the others are doing, but each can be sure that it's not the only one getting RMI's strategic and technical advice.

Meanwhile, RMI's Green Development Services is working with a special group of early adopters within the commercial real-estate industry. Called the Merritt Alliance (LLC), the consortium sees an emerging market opportunity in integrating highly resource- efficient building products--from heat- ing and air-conditioning systems to office furniture--thus offering "lean, clean, and green" offices to major corporations.

The Merritt group is literally practicing what RMI preaches. As a non-equity partner in the consortium and a consultant on a pilot project, Green Development Services is encouraging and helping these early adopters to realize a competitive advantage. If they do, competitors will be forced to follow, moving green design a step closer to the corporate mainstream.

 

CARROTS AND STICKS

Markets work on incentives. RMI has found that dangling a competitive carrot--the promise of greater profits, better services, or less risk--generally elicits swifter and surer improvements in resource efficiency than sticks like mandates and taxes. With the hypercar and Merritt initiatives, RMI has made an end run around policy debates, which are usually about which stick to use, by instead offering individual companies a chance to gain a competitive advantage over rivals. It's an offer they can't afford to refuse.

But in the case of the hypercar, there's a stick, too. The car companies' competitors have access to the same information. And if hypercar technology transforms the industry even a tenth as much or as fast as predicted, failure to pursue it may be fatal to an automaker's bottom line. By providing practical guidance toward the hypercar vision--and reminding firms that without vision the profits perish--RMI is not only presenting a new market opportunity but also substantially upping the risk of inaction.

Green Development Services has to take a different tack with real-estate developers. The market for real estate is intrinsically local, and within each local market developers carve out their own niches. Moreover, each project is unique. Thus if one developer produces an innovative product, others in the area need not rush out and match it--they can afford to wait to see how it fares financially before jumping on the bandwagon. This can take years.

But carrots still work. Green design can produce buildings that are not only cheaper to run but also more beautiful, comfortable, and healthful, which makes them more marketable, which ultimately makes them more profitable to build. That message gets through to developers. Leading by example, GDS publicizes case studies of successful green projects and quantifies their bottom-line benefits, and is currently preparing a book aimed specifically at real-estate developers.

 

EXPLOITING RIVALRIES

If resource efficiency is so profitable, why isn't Rocky Mountain Institute making a killing? Why, for example, doesn't it patent the hypercar concept and license it?

Of course RMI's aim is to promote resource efficiency, not to make a profit. But more to the point, the Institute can advance such good ideas far better by giving them away.

If you have an idea for a product and you start a company to manufacture it, you might fail. If you patent the idea and license it to another company, the licensee might fail to bring the product to market (perhaps even deliberately). But if you give the idea to two dozen companies, and exploit their rivalries just a bit to maximize the competition between them and get them fighting over it--well, your idea will be off to a running start.

So instead of starting one hypercar company, RMI has in effect started two dozen. That's 24 cracks at developing a viable hypercar design--and 24 companies keenly motivated to do so because each knows that the other 23 are doing the same. It's a Darwinian approach: may the best design win. RMI plays no favorites; it just wants results. There's nothing like competition to stimulate good ideas, and to make good ideas better.

 

FORGING ALLIANCES

Sometimes cooperation is in order. Where appropriate, RMI acts as a matchmaker within the budding hypercar industry, helping forge alliances between bigger, stronger companies and smaller, more nimble ones.

In the case of the Merritt green-buildings initiative, Green Development Services is an actual partner in the mar- ket-driven consortium. This direct participation gives GDS staff greater access to the other partners, and greater influence over the development of green products and services. The downside, of course, is that it allies RMI to a small group of players in the market, but the ultimate purpose of this alliance is to motivate others. And RMI has ways of getting their attention: if one firm won't play, at least one of its competitors probably will.

GDS is looking into other ways to influence companies through active partnership. Another initiative, already well under way, is to work with four commercial development-design teams to test performance-based fees that reward architects and engineers for what they save, not for what they spend. Such attention to correcting perverse incentives, so we reward what we want rather than the opposite, builds an essential foundation for enabling markets to do what they do best --without trying to make them do things they can't do at all, such as substituting for ethics, religion, or politics.

Sooner or later, good ideas win out. RMI's job is to make sure it's sooner, since delay in addressing environmental problems only compounds them. Market competition will do most of the work, but sometimes it takes a timely nudge from a cranky little nonprofit to get the process going.

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Rocky Mountain Institute is a nonprofit research and educational foundation with a vision across boundaries. Its mission is to foster the efficient and sustainable use of resources as a path to global security. The Institute creates, and helps individuals and the private sector to practice, new solutions to old problems—mainly by harnessing the problem-solving power of market economics and of advanced techniques for resource efficiency.

PROVOCATIONS is an online journal of architecture and ideas.

Editor: Susan Bilenker, info@design-site.net.
Publisher: Susan Bilenker Communications for DesignSite™ .
Opinions expressed by authors published in Provocations are those of the authors and not necessarily those of Provocations, DesignSite, or Susan Bilenker Communications.