From Goods to Performance: An Interview with Walter Stahel

Q: You coined of the term "Cradle-to-Cradle". Could you give a brief overview of what this term means and how it has been received?

A: The original idea was that you could actually turn the economy from a linear industrial economy into a loop and avoid the problems associated with resource extraction and waste management. Of course people concerned, especially in waste management, disapproved because it basically meant that they would lose potential business. What has actually happened, however, is that they have transformed from waste managers into resource managers.

In making the Cradle-to-Cradle concept work, it is actually the manufacturer that is the key economic actor. He controls the design of the goods, the choice of materials, the way to commercialize them. And this is why for me, from a strategic point of view, it's really important for manufacturers to stay in control by closing the loops of goods, materials and also liability themselves.

Q: Have you encountered any resistance from organizations that have unique designs or proprietary technology and do not want their product reused or recycled?

A: No, because re-using, re-manufacturing and technological updating are accepted as long as you change the identity. (Remanufacturing produces goods as good as new; technological updating brings a product up-to-date technologically). Changing the identity means you have to re-manufacture. The re-manufacturers, for example of a Mercedes Benz engine, have to put on their own label, so that it is no longer a Mercedes Benz engine but, for example, a 3R engine. On the part of many manufacturers there is still a defensive attitude, because they refuse to go into the dirty business of re-manufacturing.

Other examples, like Caterpillar, have shown that if a corporation gets involved in re-manufacturing, they very quickly realize that they not only can do it as good as any third party if not better, but they can learn from the re-manufacturing to change the original design so that the engines are designed not only for manufacturing but also for re-manufacturing. In the case of Caterpillar, they started it without real conviction at the top and only once it turned out that return on investment was much higher than in manufacturing, the top management said “okay, let's try to improve this”.

Q: You say that the cost of a performance economy builds on our non-emotional concept of sustainability. Can you explain this further?

A: A: The difference between capital goods or investment goods and consumer goods is basically emotional. If a person buys a handbag or a pair of shoes or even a car, it's based on fashion or beauty-it's what I call a toy. The toy does not have to bring in money. Capital goods, investment goods, are what I call tools. They have to provide the revenue, so what counts is their function; buying those is much more a rational decision than an emotional decision. Companies have to buy the most efficiently performing equipment for the purpose they are fulfilling because they have to make the highest profit from their activity.

The performance economy is based on a rational, non-emotional approach, where you try to achieve the highest performance. To look at it another way, it is very difficult to commercialize consumer goods in the performance economy. People will not necessarily buy a car because it is more fuel-efficient or cheaper to maintain. They typically want the car because it has higher acceleration or a higher top speed, which is completely irrelevant, but that is where emotion plays into the decision. On the other hand, if a taxi or a car rental company buys cars or goes into a fleet-leasing contract, they want a car that gives them the highest return on equity. The objective in the performance economy is for economic actors to achieve sustainable profits in the long-term without an externalization of the costs of risk and of waste. By internalizing the costs of risks and of waste you have to accept the complete product liability responsibility from cradle to cradle. By internalizing all the costs of risk and of waste, companies will design goods in a way that minimizes risk costs and waste costs.

A resource-miser company, a company that uses very little resources and has a high value-per-weight ratio, or companies that internalize the costs of risk and waste, are more likely to have profit stability in the long-term as they control the total cost environment, not only the manufacturing costs.

Q: You mentioned Value-to-Weight ratio. Could you delve deeper into that concept?

A: My book, Performance Economy, brings forward two new metrics. The first is that if we agree that what we need is an economy that grows and increases its value, but at the same time uses fewer resources, then the logical mathematical ratio is to simply divide the annual revenue of a corporation by its annual material consumption or product output. The result could be a simple dollar-per-kilogram ratio that differs greatly from one company to another and from one product to another.

To give you an idea, there are basically three different types of economies: you have what I call the Stone Age economy that produces goods such as steel and cement with a sales value of a few cents per kilogram. Then, if you look at industrial goods, cars, computers, buildings, machinery, you are normally in the area of $20 to $50 per kilogram. But if you go to the really high performance industries that typically include high-tech companies, biotech companies, enzyme companies, nanotechnologies, you can easily find a value of a million dollars per kilogram. In the best biotechnology case you even get a million dollars per gram of the product sold. Therefore, it is this dollar-per-kilogram ratio that allows you to identify which of the companies are producing value with very little resource input. The second ratio is the man hour-per-weight metric.

Q: Corporate sustainability is now viewed as a competitive advantage in the performance economy. What are the challenges for corporations embracing this type of strategy?

A: The challenge is that you are no longer a producer of material goods, materials such as chemicals or goods such as cars, the mass production “things”. If you are producing chemicals or cars, you can do this globally in one factory and then sell the products worldwide. If you are selling performance you can no longer do this from one central location. You have to be present in all the regions where your products are used, because you need some supervision, you need to provide repair services, you need monitoring and you may need to take the product back for re-use.

If you are really selling performance, then in the case of automobile manufacturers, you would actually lease the car, selling only its utilization. However, included would be the fuel and insurance, along with trying to minimize all the cost items associated with operating and maintaining the vehicle, such as high fuel consumption and risk of accident. The biggest risk for a manufacturing company moving into the performance economy is that if they make a mistake in the design or manufacturing process the company will pay for the mistake itself. If you are selling performance in the long-term perspective, then all the design faults will impact the manufacturer. In other words if you are leasing cars and after two years the cars break down because they have an engine failure that is due to design fault, or the engine block breaks, then the manufacturer suffers complete loss of its asset or has to pay for re-manufacturing it. If you are selling the products, all the costs during utilization are borne by the buyer/user. If you are leasing the product/goods, you as the leaser have to internalize these costs.

Q: Which companies do you think are closest to achieving sustainability, or have successfully moved from selling products to selling performance?

A: In the area of capital goods or industrial goods there is a long list, starting with Xerox as a classic example. Another is textile leasing, an industry that exists in almost all industrialized countries. The linens from hotel beds and bath towels from hotel rooms no longer belong to the hotel, but to a textile leasing company that does the washing and repair, with an economic break-even point of, say, three years. Now if a company knows that after three years they will start earning profit, and of course these things have to be in a presentable condition, they basically have to use very high quality textiles. The linens should last if possible for four to five years for the textile leasing company to make money. A similar example of this, called pay by the hour, can be found in the gas turbine industry.

In the case of truck tires, Michelin has now moved into selling the performance of tires rather than selling the tires, because they can produce a long-life tire that is easy to re-tread and earn a higher profit. If the same tire can do twice the distance they get twice the money, whereas before if they produced a long-distance tire that lasts twice as long as a normal tire, the buyer would not be prepared to pay a higher price and so therefore it would actually reduce their turnover.

Infrastructure and facility management is another classic case, in other words, airports, bridges, the channel tunnel between France and England – this sector has really taken off and is called Private-Public Partnership or P3. In those cases the whole responsibility for design, finance, insurance, building and operating is passed on to the private sector which means that all the traditional ways to provide economic optimization that are less developed in public markets, now come into play.

Q: The United States leadership will change this year. Are there policies you think could inspire or motivate the performance economy?

A: Every politician, every presidential nominee wants to create new skilled jobs, and want to save resources, energy and material. If you want to achieve these objectives, we know that typically the most efficient strategy is money-taxes for example. In other words, if you want to promote labor and discourage the use of resources, don't tax labor, tax resource consumption. The second aim of the performance economy is to increase labor man-hours, and at the same time reduce the amount of resource consumption: the second metric of the performance economy is the labor-per-weight ratio, which you can calculate for products, corporations or sectors. We are faced with a situation where human resources are abundant and non-renewable natural resources are becoming scarce. We basically agree that human labor is a resource that should be favored to reduce unemployment and social problems, and we also know that industrialized countries have to reduce their resource consumption, material and energy for different reasons-global climate change and scarcity of strategic resources-so logically it would make sense to tax labor less and start taxing resource consumption.

Q: Where do you see the opportunities in the next twenty years?

A: There is an approach, a method called back-casting. You put yourself in the future, say in the year 2050, and then look back to the present and see the present as a scrap yard. You try to see what pieces will still have marketable value in 2050 and you focus on those. Obviously food is one, drinking water is another, and some technologies such as fuel cells and hydrogen are a part of this. You make a list and then derive from this list what opportunities you can go after yourself. For example if you are an equipment manufacturer you might look at desalination plants that provide cheap drinking water in hot coastal countries. You can do the same with science and technology. It is important to look into the future and informatively speculate on what the conditions might be, basically what the world might look like in 50 years.

*Footnotes