QUALITATIVE GROWTH AND COMPLEMENTMY TECHNOLOGY: BEYOND T H E TECHNICAL FIX

David Fleming, The Strategy Workshop

Abstract

A t present, improued environniental perfimiance and corporate growth work hand in hand as part of a single business strategy. Growth enables the company to invest in envimnniental technology; enuironnrental technology in turn enables it to grow while holding increases in enuironniental impact to a minimunz. But this 'Golden Age' relationship corild break down as the environniental benefits of technological aduance are ouerwhclrned by growth in OLitprit. For this reason, there is already concern in some indrrstries that the need to protect the environnient may lead in due corrrse to regillations designed to suppress ,Ciirthcr growth. However, any attempt to suppress growth ii~oirld hazw extremely severe econoniic implications, and ruorild require us to address the Growth Enigma: hoiu are the needs of II stable economy and a stable environment to be met at the same time? The concept of 'qiialitati7~e growth', i.e. corporate strategy based on a reduced rate of growth, is examined with spccial refircncc to the airline indirstnj and to Swissair, which has recently announced a qiiditutrve growth s t r a t ~ y ~ . lt trirns ou t that the coinpany is not in fact implementing the stratem, but the declaration of intent itself rmeals some valiiable lessons rohich nruy help in a solution to the central problem of growth and the environiiirnt.

Introduction

With good reason, this could be described as the Golden Age of environment policy. In every developed country of the world, companies are improving their eco-efficiency (environmental impact per unit of output); in many cases, advances in eco-efficiency are so great that companies are able to reduce their total environmental impact while still enjoying the benefits of growth.

Moreover, standards of quality are rising. That means quality in the form of the design, performance and durability of the product, lean pioduction and high quality service in specification and delivery. Implicit in this standard of management and technology is the evidence that high-quality production means a lighter tread on the envimnment, so that benefits flow to customers and the environment alike.

But Golden Ages do not last indefinitely, a i d since it is implicit in the practice of environmental studies that we should look ahead, even though we may not like what we see, this article argues that the Golden Age contains within it the seeds of its own demise, and that we should begin to turn our minds to what may come next. In brief, the piece suggests that, if the present policy emphasis continues, improvements in eco-efficiency will become overwhelmed by the sustained momentum of growth in industrial output.

If that suggestion is correct, we may need to extend the thrust of environmental protection from controlling the impact of growth, to suppressing growth itself - a prospect which, at first sight at least, is so unacceptable that it has not so far merited serious consideration. But silence on a strategic option which could play a decisive role in environmental protection can no longer be justified, and it is the intention of this article to break that silence. I n doing so, it will attempt to outline some of the fundamental problems of a suppressed growth regime, and some of the practical implications for business strategy.

At this time of recession, the impact of growth seems to be the least of our problems. However, the overriding aim of economic policy is to set the global economy back on a growth path. Even in the very unlikely event of there being no end to the recession, we would still need to consider policy-alternatives to growth - that is, ways of coping in the absence of growth; Without such policies, permanent recession would lead progressively to unemployment and to the beginnings of a process of economic and social disintegration. Contemporary economies, both developed and developing, are wholly dependent on growth, a dependency which is problematic whether it succeeds or fails. We

VolLinif 1, Nrrmber 4, Winter 1997 13

Qualitative Growth and Conzplinienfay Tedino/ogj

should not allow attention to be diverted from the impact of growth by the fact that it is at present proving hard to achieve.

12

Figure I:

1CQ

80

60

40

20

0 L I I

1 2 3 4 5 6 0

Period (age)

. . -

/

- 1 2 3 4 5

Peciod (age)

4 6

The article begins with a simple model of the 'Six Ages of Environment Policy'. I t then discusses business strategy in the context of suppressed growth, under the label 'qualitative growth'. The practice of qualitative growth is illustrated with the case of Swissair, which clearly demonstrates the problems of implementation. General conclusions are drawn on the place of qualitative growth in sustainable development.

Part One: Growth and the Environment: The Six-Ages Model

I. The Six Ages of Environment Policy

At present, we run the risk of the 'contemporary fallacy' - supposing that the present state of affairs, and the circumstances of environment policy in particular, a w here to stay. Part One of this article, therefore, attempts to place current business-rnvironmental policy and conditions into a time-context in the Six Ages model, which identifies the present day as a time of especially rich opportunity.

The description of the six ages of business-environmental policy that will be set out in this section is schematic, which means that it simplifies in order to make its point. The changes in output and environmental impact quoted in figure 1 are not intended as an exact statement of the record of any one industry, but as a general account of changes occurring in the industries that make up the industrial economy. The underlying presumption is that the majority of industries now operating employ comparable technologies and are at a roughly equivalent stage in their approach to environment protection policy. Despite some clear exceptions to this, such as biotechnology and photovoltaics, the evidence for i t is persuasive. Environmentally-relevant technology, systems and standards, fuels, transport arrangements, training services, regulations, customers and attitudes, are widely shared between industries, and firms work so closely together that it can be helpful to speak of a single 'industry' as providing the employment, goods and services of the modem state. It is this composite industry to which we shall chiefly refer,' however the air transport industry provides a par- ticularly striking illustration for the model, and this is the industry from which examples are drawn.'

The model is set out in terms of two variables: firstly, the volume of output, measured in units (such as the passenger-tonne kilometres (ptks) used in the airline industry). Secondly, environmental impact, (such as the airline industry's high altitude emissions of carbon dioxide, nitrous oxides and water vapour). These variables are shown in the top chart of figure 1; the bottom chart shows the ratio between them - that is, their eco-efficiency.

14 Biisincss Stmtegy and the Environment

Qualitatiue Growth and C o m p b n m t a y Technology

The Six-Age Model is based on the assumption that policy will be 'reactive', or 'business-asusual'; that is to say, the governing principle is that of minimising pain in the short term, and the future is heavily discounted. This means that there is an implicit and preferred alternative - a 'precautionary regime' - in which policy is adjusted in the light of anticipated changes.

1 - 1 Early Growth

In the first age, Early Growth (say, between the mid 1930s and 1970), the modern consumer goods industry, having become established, grows rapidly, and its environmental impact grows even faster. In the model this is illustrated by a 100% increase in output, and a 140% increase in environmental impact. In this period, the priority is to improve product quality and performance, rather than to reduce environmental impact. The return on investment in performance is high, since technological development still has a long way to go. Environmental impact, on the other hand, is still in the main unrecognised, and there is little incentive to invest in environmental protection, as distinct from investment in the core technology of the industiy, SO environmental impact rises. The combined effect of the rise in both output and envimnmental impact is shown (in the bottom chart) by a 20% deterioration in eco-efficiency.

It was on this kind of investment - in performance improvements - that the emphasis was laid LI the case of air transport between the mid 1930s and 1970. The results were impressive. The mean cruise speed of the DC3, which entemd service in 1936, was 252 h / h , and the aircraft's productivity was 527 tonne-kilometres per hour (tk/h); the DC10, introduced in 1971, had a mean cruise speed of 915 km/h, and a productivity 45 times that of its forebear, at 24,730 tk/h. Operating costs fell correspondingly - halving, for instance, between 1955 and 1970:

But the cost of this improvement was borne by the environment. The DC10, like aircraft of the present day, cruised at high altitudes (above 9,000 metres, in the tropopause), where emissions are far more damaging than at the lower cruising levels of the 1930s. Moreover, a doubling of speed requires more than a doubling of energy, so that the energy efficiency of the DClO's engines was less than that of the DC3, in spite of the gieat engineering superiority of the sophisticated jet over the piston-engine.

1.2 Development

In the Development Age (say 1970-1990), output continues to grow exponentially with a further doubling, and environmental impact rises too, but at a slower rate. Technological and systems advances are now being used to improve not only performance but also efficiency and productivity as reduced wastage, better engineering and increased energy efficiency bring a recovery in eco-efficiency, down to below the level at the start of period 1.

It is important to note that the source of the improved eco-efficiency in this phase derives not from any intention to reduce environmental impact, but from an intention to raise performance through advances in productivity. All productivity improvements are essentially ways of getting more out of less - and this has environmental benefits in terms of eco-efficiency (though not necessarily in terms of absolute amounts of environmental impact).

Airlines, again, offer a good illustration of this improvement." The airlines with the best environmental records - such as Swissair and Lufthansa - maintained a purchasing policy which enabled them to double their fuel efficiency: the aircraft now in use require about half as much fuel per ptk as they did in 1970, and this has sharply improved the eco-efficiency of air travel, though the absolute benefits have been entirely overwhelmed by the increase in output. On the other hand, the decline in unit costs slowed, falling by only 20% in the period, and productivity improved by about 100% - These are minor advances by the standards of the Early Growth Age.

1.3 The Golden Age

In the Golden Age of environmental improvement (say 1990-2005), the industry consciously directs effort towards efficiency advances and, as in the Development Age, it achieves improvements both in unit costs and in eco-efficiency. But in this period the emphasis is different. Companies are prepared to re-examine their options in the light of environmental performance, and this perspective

Volunie 1, Ntrniber 4, Winter 1992 15

Qualitative Growth and Conipliriientanj Technology

results in a radical new stimulus for change. Companies implicitly rank policy options for improvement in environmental performance under three categories: (1) those which give a payback in the short term, or which are legally required; (2) those which give a payback in the longer term; (3) those which cannot be expected to provide a payback but which need to be implemented for reasons of corporate policy.

At first, companies benefit from immediate environmental and commercial payback, but as the Golden Age progresses they increasingly acknowledge the need for, and implement, environmental pro tection measures with minimal or zero commercial advantage. However, the Age brings substantial benefits for firms. It offers a new paradigm for performance and progress in all industries, including mature industries in which the scope for discovery and development would otherwise be on the wane. It provides a stimulating culture and makes available new criteria for competition policy and for differ- entiation between companies, which would otherwise by jaded by homogeneity - by a convergence of technique and experience, with similar pmducts and services being produced to similar standards.

The Golden Age provides success stories hi many industries in terms of absolrtte improvements in environmental performance (reduced emissions to land, water and air) results which are not only consistent with growth in output, but which derive from investment funded by the revenue earned from growth in output. On the other hand, the absolute improvements in performance achieved by some companies is cancelled out by continuing growth in the environmental impact of others. So the net change in environmental impact on the period is shown in the model as zem - but the achievement of the Golden Age is illustrated by the 100% improvement in eco-efficiency - from 1.5 to 0.75."

This is the period in which the case for sustained growth, along with the investment in environmental performance, appears to be spherically justified - and is borne out from every perspective: Environmental investment tames the impact of growth; growth finances the cost of environmental investment; environmental investment provides opportunities for further growth.

Golden Age advances in aviation are producing impressive results. The airlines with the most advanced envimnmental policies are predicting a further 50% rise in fuel efficiency through the 1990s, and development programmes are under way to reduce NOx emissions, even though this involves using technology which is yet to be developed. As Willi Shurter, Technical Director of Swissair said recently, 'It is not going to be easy, and we don't yet know how we are going to do it.' But the necessary investment will be made.

1.4 Late Growth

In the fourth period, (say post 2005) sustained improvements in environmental performance become much harder to achieve. The model suggests that a further doubling in volume would be associated with a 60% rise in impact - outweighing the 20% improvement in eco-efficiency. This is for two reasons. First, the most accessible technologies, and those with the best environmental and cost payback, have already been exploited. The major technological shifts, such as the replacement of solvents with water-based chemicals, the most accessible improvements in energy-efficiency, and the design of products for demanufacture, have now been developed. Certainly, revolutionary technological improvements - for example, the conversion of the entire transport fleet to some form of solar- or fusion-derived propulsion may yet be feasible. But the lead time on massive infrastructural changes of this kind is long, and the technology that would be required to deliver the change at an affordable price still does not yet exist. Secondly, the environmental performance improvements of the Golden Age are now being overwhelmed by growth. Eco-efficiency improvements continue, but are being overtaken by global output, with contributions to growth being made by the younger and rapidly growing industries of the developing countiies.

The problem becomes starkly clear when we bring these two factors together. As growth continues, pollution abatement has to become increasingly moir effective, simply to keep pollution levels constant. Yet, once a certain standard of pollution abatement has been achieved, further improvements become increasingly, even prohibitively, hard to achieve. This is a period of heightened tension between the acknowledged but now clashing needs (a) to reduce enviirmmental impact and (b) to maintain the momentum of growth. Throughout the period, growth momentum is sustained, but by the end of it the tension between the imperatives has grown to breaking point.

16 Business Stri7tepj cind the Environment

Qiralifatirw Growth and ConiplemenfanJ Technology

The airline industry already offers a striking illustration of the problem. Its contribution to the greenhouse effect and to ozone destruction have alieady reached the point at which the notion of regulation to suppress growth in the industiy is causing alarm.6 Moreover, the Barrett Report calculates that, even highly effective technical improvements - involving efficiency improvements of 150% on the present level (approximately equal to the improvements indicated in the Six-Age model) - will be overwhelmed by the increase in demand. It concludes:

The officially projected growth of demand in terms of distance travelled by passengers and aircraft will offset any technical improvements, increasing pollution.’

The end of the Late Growth period does not occur at the moment when it becomes clear that the only way of halting the rise in environmental impact is to set a ceiling on output; That is an insight which will have been growing throughout the Golden Age. The Late Growth period ends when, given the choice between intensified envimnmental impact and loss of growth, the latter seems to be, terms of immediate pain, the lesser of two evils.

1.5 Standstill

The Standstill could be brought about by coordinated public policy, but it would only be adopted with extreme reluctance. The outcome of irrefutable evidence that the capacity of the environment to absorb further impact had been passed and that the attempt to extend economic growth yet further would fail.

1.6 Correction

If the environmental impact of industrial output - the demand made on environmental services - is greater than the environment can sustain, then there must be a period of correction, long and deep enough to allow recovery. If it is too long delayed, it degenerates into collapse.

There are two types of correction:

1. Policy-based. This would take the form of a deliberate cut-back in output, in pursuit of a policy designed to protect the environment from further damage and to enable it to recover from the damage inflicted so far. This is the preferable option, because it gives policy-makers and industry some control over the timing and intensity of the adjustment. Forced. This would take the form of an unavoidable loss of ability to maintain output a t the original level, owing to the environmental damage that had already been caused.

2.

A decline in output, if sufficiently steep, would lend to a fall in environmental impact. However, an industry in decline would have less Incentive, and fewer resources, to invest in environmental performance, so the fall in environmental impact would almost certainly be slower than the decline in output, owing to the abandoning of some efficiency improvements.

11. The Growth Enigma

The Six-Age Model sets the present period of exceptional improvement in environmental performance into context. Its central conclusion is that the present Golden Age of environmental policy could be giving us a profoundly misleading message. It encourages companies and policy-makers to believe that the desired goals of (a) quantitative economic growth, and (b) improvement in environmental performance are not only mutually consistent but mutually dependent: as it provides strong apparent endorsement for the persuasive view that there can be no environmental improvement without growth, and no growth without environmental improvement.

From the point of view of business strategy, this belief appears to be justified abundantly. Companies finance investment in environmental improvement out of the earnings derived from a prosperous, growing business. No growth means no funds for environmental investment. However, from the point of view of the environment itself, the matter looks different. From this perspective, the benign partnership between growth and environmental performance is a special case, because:

(a) higher growth will require greater improvements in eco-efficiency just at the moment when:

Voirtme 1, Number 4, W i n t e r i992 17

Qualitative Growth and ConzplintentaT Technolopj

(b) the standards of eco-efficiency that have already been achieved will make further improvements harder to achieve.

It follows that a long term solution will require attention to be paid to the economic problem of growth in the same way that, at present, attention is being directed to the technology of environmental protection. However, any attempt to suppress growth would present pmllems of bankruptcy, falling incomes and rising unemployment, at least as great as the environmental problem itself. Society needs growth every bit as much (although in different ways) as it needs environmental protection. Without economic growth, the economic system falls apart, because labour productivity improvements would feed straight through to unemployment. This would rise without limit and beyond the level at which society has the means of meeting the material and other needs of the unemployed. Yet without environmental protection, the ecosystem falls apart.

Figure 2: The Growth Enigma

To find t h e common ground between

f----\. -..

Economic Environment

The task of finding the feasible path between these two critical risks to the economy and the environment is the Growth Enigma (figure 2). This shows that developed and developing nations alike need to achieve both

- economic stability and - environmental stability.

The two instruments available to achieve these aims, are:

technology management and - growth management.

The question of how to achieve these two goals by using some combination of these two instruments is the central issue for economic management and business strategy.

1x1. New Technologies and New Industries

The most controversial feature of the model is the inference that improvements in environmental performance will be outpaced by growth. There is a widespread assumption which almost has the status of folkloie: that a dramatic new technology will develop, which will deliver all the industrial output we need at a drastically reduced level of environmental impact. The precautionary principle would require us to act as if it will not happen; equally, it would be wrong to dismiss such a possibility. Even i f it did occur, it would neither confound the Six-Age Model nor solve the Growth Enigma, for the following reasons:

(1) Time-lags. A new technology with the radical effect needed could emerge, but its development on a global scale would take a long time. The implementation of an entirely solar-based (or

18 Biisiness Strategy and the Environment

Qua/ifatilw Gro~oth and Contplenientay TechnologJ

cold-fusion-based) economy, for example, could take several decades - that is, it would take US

well into the period of substantial, and in some respects irreversible, environmental stress. Moreover, the growth that occurred in the meantime would set a far tougher target for emission control, so that a technology which could solve our current problem could well prove inadequate for the problems imposed by the greater levels of industrial output in the future. Extended Golden Age. The technical fix would postpone the time when improvements in environmental performance were overwhelmed by the volume of growth, but this postponement would not be indefinite. It could therefore be seen as an extension of the Golden Age, and not as a contradiction of the structure of the model. Substitute or complement? The effect of the new technology would depend on whether it is a substitute for, or a complement to, existing technologies. A successful substitute would have to be highly efficient in terms of labour and resources alike; i f it were not, then its costs would be high, and it would be unable to compete successfully with the current technologies. It would therefore not be a major job creator, and would leave the underemployment problem unsolved. If it were a complement, it could well be a significant source of growth and jobs, but - no matter how eco-efficient it was - it would not reduce the environmental impact of existing technologies. In other words, the new technology, if it develops, could not solve both the ecological and the economic problems at once.

Could two new technologies do it - one for each problem? There may be a clue here, and it will be followed up later. But even that clue, in common with all solutions to the problem, involves some form of growth limitation - a strategy whose positive implications will now be given their proper emphasis with the label ’qualitative growth‘.

Part Two: Qualitative Growth

I. Meanings: Quality and Growth

’Quality’ and ’growth’ have a range of meanings or subtexts in business strategy. To forestall ambiguity:

1. Quality Management

‘Quality management’ is that system of management which is designed to achieve high standards by preventing errors, i.e. by producing goods and services exactly to the specification demanded. The design of management systems capable of achieving results of this standard is set out in British Standard 5750 and in international standards.

2. Quality Development

There is a process of ‘quality development’ at work in the succession of technological and efficiency improvements which underlie the growth and development of an economy. This has in fact involved huge improvements in eiivironmental efficiency (as in period two of the Six-Age model), even though that will not normally have been the firms’ primary intention.

3. Quality Widening

In the last decade, the concept of quality has bioadened to include environmental issues. This is not the first time the concept of quality has embraced policy options from which the firm does not expect any direct gain: in the 1970s the social audit movement raised awareness of companies’ wider responsibilities to society; throughout the nineteenth century there was a developing recognition that firms’ concept of quality should extend to issues such as health and safety at work, even though investment in such matters may not have offered the prospect of any short term payoff. Quality widening is implicit in the concept of stakeholders, which defines the full range of interests to which firms have a responsibility.

4. Balanced Growth

From the point of view of long term market strength and profitability, there is an ideal rate of growth. Excessive growth can mean high costs, increased debt, excess capacity and falling profits. Too slow

Volrtme I , Number 4, Winfer 2992 19

Q u a f z ta rive Growth and Co nip 1 inzm t u nj Tech nologft

a growth can mean loss of market share, low innovation and reduced prospects for future profits. Balanced growth, which is the optimal rate of growth for the company, is set in the middle ground between these extremes.

5. Qualitative Growth

Qualitative growth is defined here as any sustainable strategy, inuolving a rate of growfh less than that of bafanced growth, implemented with a view to reducing environmental impact.

Qualitative growth does not necessarily mean no growth in output; It means a rate of growth less than that which (in the absence of environmental concerns), would be the optimum - and achievable - rate of growth for the firm. It is essential to recognise this growth-limitation feature of qualitative growth if the argument that follows is to be understood.

The company which does adopt the self-limiting strategy in a growing sector presents itself with a formidable set of problems; indeed, its survival is threatened. In the next section we shall consider the strategies open to companies that wish to survive the self-inflicted handicap of suppressed growth.

11. Feasible Strategies

A company tha t takes unilateral action to limit its growth would normally be running the risk of losing its independence within a relatively short period. Shareholders invest in the company in the expectation of sustained gi-owth in earnings, and this expectation would be substantially diminished in the case of a company that adopted a self-limiting strategy. Moreover, the lack of growth would lead to a loss of economies of scale relative to competitors, a reduced rate of investment in improved technology, loss of marketing visibility, a weakened distribution network, a reduction in incentives for staff, and predatory acquisition. Any one of these could be fatal to a company, and a strategy of qualitative growth would be an invitation to all of them. This set of problems will be referred to below as the stagnation crisis.

Are these dire results unavoidable? The attempt to answer this question will be based on four basic strategy types open to any company aiming to survive and prosper in its market. They are (1) increased sales; (2) reduced costs; (3) increased yield (higher revenue per unit sold); (4) regulation (ie. protection from some forms of action by competitors, but at the cost of sacrificing some freedom of action to a regulatory authority). To what extent do these strategies offer feasible solutions to a company committed to qualitative growth as a sustainable policy?

1. Increased Sales

By definition of qualitative growth, this strategy is essentially blocked: the company has committed itself to a lower-than-balanced-growth rate, i.e. to a level which could range from moderated growth down to negative growth. Therefore the qualitative gi-owth company faces the stagnation crisis. The remaining three types of strategy set out in this section may have some contribution to make to help the company solve this difficult, potentially fatal, dilemma.

2. Reduced costs

Unit costs can be reduced by controlling operating costs and, more significantly, by developing and installing technologies which can lower unit costs. These substitute technologies (substitute in the sense that they are advances on current technology) may well be necessary but are far from sufficient to achieve qualitative growth. Indeed, they may have the opposite effect, requiring heavy investment which can only be paid for by growth. They may also have the perverse effect of reducing added value and product differentiation, thus forcing the companies concerned into the status of commodity producers, in which case the pressure to protect turnover by maximising sales increases still further.

3. Increased Yield

The third potential strategy for qualitative growth is increased yield, i.e. a higher return per unit of output. It is implemeiited in three ways: (1) By a carefully-designed pricing policy, in which (for

20 Business Strategy and the Environment

Qiralitatwe Gro7oth and Co riiplenientary Trchnolog~l

example in the case of airlines) fares are accurately matched to the specific characteristics of mutes, season and markets. This is feasible, and is a high priority for any industry, especially in the current stagnant market, but it is not specific to a company that has adopted a qualitative growth strategy. (2) By better use of existing capacity, for example, in increased loading factors for aircraft. Overdue emphasis is now being given to this by all airlines, but it will not prevent an increase in environmental impact following in the wake of output growth in the longer term. (3) By an emphasis on premium business. Here at last is a strategy which offers some promise for qualitative growth, and it will be described under four characteristics: (a) labour-intensive output, (b) low environmental impact, (c) low rate of growth, and (d) low price elasticity.

Labour-Intensive Output

Advances in productivity occur unevenly in different sectors of production. There are technologically progressive (TP) sectors, characterised by sustained productivity advance, where the consumer benefits both from a fall in the price of the product and (often) from improvements in its performance and quality. This sector is the driver of growth and it includes the large majority of the output of the manufacturing and service industries.

There are, however, also forms of production which are technologically non-pmgressive (TNP), where productivity advances are not made systematically because such advances would largely defeat the purpose of the product or service concerned. For example, personal service in restaurants is expensive precisely because it is personal, but attempts to introduce impiovements in technology and productivity would change the nature of the service, thus shifting the restaurant into a different market. The classic instance of this labour-intensive sector is live performance. As one writer put it:

A horn quintet calls for two and a half man hours in its performance, and any attempt to increase productivity here is likely to be viewed with concern by critics and audience alike!

The TNP sector, however, is not limited to the classic personal service industries; it is also implicit in the top-of-the-range sectors of technologically-progressive industries. Examples include: transport - first class and business-class service, though based on the TP transport system, uses relatively labour-intensive personal services for premium-paying passengers; motor vehicles - the custom-built car, produced by a company with a low-growth st rate^;^ the clothing industry - bespoke tailoring and dressmaking, at the top end of the industry; food production - organic food, grown with relatively labour-intensive methods; construction - the custom-built, energy-efficient, eco-efficient building. All of these are associated with TI' industiies, but they are labour intensive forms of output.

Low Environmental Impact

TNP output typically has a low environmental impact. Labour-intensive output is relatively unproductive, since it does not depend heavily 01-1 technologically advanced equipment. True, it makes use of such equipment - such as the novelist's computer, the gardener's motor mower, the artist's acrylic- paints - but this merely reminds us that, in fact, we are looking at spectiurn stretching between technologically progressive and technologically non-progressive output, and that we are focusing on the let! hand (technologically non-piugressive) end of the spectrum.

The environmental impact of the TNP sector, thedore, tends to be low, and in practice, examples of TNP output bear this out. Additional personal services supplied to air travellers, for example, have relatively slight environmental impact, as do many forms of the arts, entertainment, education, and catering (although the environmental impact of the associated activities such as transport may be high). It is the very inefficiencies of the TNP sector, involving human input relatively unaided by equipment, that give it a light impact on the environment.

Low Rate of Growth

The third feature of this premium sector is that its rate of growth is relatively slow. Since the advance of productivity in the sector is low or even negligible, the sector cannot grow as the TP sector does by increasing the volume of output achieved per unit of capital and labour. Instead, it can only expand as households transfer part of their incomes away fro^^ the TI' sector into the TNI' sector.

Volume 2, Number 4, I M n t r r 1992 21

Qualitativr Growth and ConiplinientrrnJ reclznologJ

But even that transfer of expenditure from the T" sector into the TNP sector is slow and faltering. As the cost of a unit of output in the TI' sector falls, (owing to productivity advance in that sector), the relative costs of output in the TNP sector rises, SO that TNP output is consistently seen as a luxury, despite the rise in incomes that accompany economic growth. The slow rate of growth in the sector means that a company with a qualitative growth strategy that focuses on the sector will also have a slow rate of growth unless at the same time it expands its market share.

Low Price Elasticity

The fourth feature of the TNF sector is that it may, in certain circumstances, have a low price elasticity i.e. a marginal increase in the price of TNP output has a relatively small effect in reducing effective demand. Among the reasons for believing that the sector may be relatively tolerant to marginal increases in prices are: (1) TNP output is already relatively highly priced (so that households expect to pay a high price when they come to the market); (2) Its products and services are highly differentiated with respect to each other (for example, every restaurant has its own character), so that it is not easy to compare their prices; (3) There is often a Giffen-good factor at work: the price itself provides some reassurance for the consumer, so that the higher the price, the more exclusive and desirable the good seems to be; (4) Some producers in the sector can successfully claim superstar status - thereby winning a form of monopoly in their business, and becoming able to charge a monopolist's price; (5) The sector can produce output of exceptional quality, associated with values such as environmental protection and creativity, and be locally available, for all of which consumers may be prepared to pay a premium.

On the other hand, some parts of the sector's relative tolerance to price increases may be outweighed by sensitivity to reduction in incomes. In principle, there is no reason why price- and income-elasticity should be different. In practice, luxury goods and services are vulnerable to falls in income due, for instance, to recession, since unessential expenditure is the first to be cut. The net result of these two tendencies is that a proportion of the premium sector may be prone to boom and bust, with exaggerated profits to be earned in good times, countered by exaggerated decline at times when incomes are coming under pressure.

The focus on increased yield in the form of the TNP sector, which is complementary with the TP sector, therefore has something to offer as the way into the qualitative growth strategy. However, there are downsides: it may be specially vulnerable to a decline in incomes; it may be beyond the reach of a slow-growth company which cannot provide a bmadly-based service; it offers no insurance against the effects of poor marketing or bad luck, and a strategy of growth limitation becomes increasingly difficult to sustain in a growing indushy. Yet the producer which adopts it has a strategy with (at least for a time) the potential to gel. TIUS is better than nothing - it means that a strategy of self-limited growth does not always have to be ruled out as non-feasible. The complementary sector may have an important part to play in solving the Growth Enigma.

4. Regulation

Government regulation designed to limit growth in an industry would present companies with severe problems, and reduce the revenue available to fund their debts, thus forcing layoffs, mergers and liquidations. However, in the longer term, it could provide conditions favourable to the development of complementary technology. Some environmental legislation is already tending to work in this direction: i t prescribes systems which are in many instances relatively labour-intensive, and more expensive for companies to implement, but whose practical value is filly acknowledged. It is often impossible for companies to implement these systems unilaterally, because to do so would place them at a cost disadvantage in relation to competitors. Only when government action establishes the 'positively-sloped playing field' do many of these high-cost environmental protection systems become feasible. Regulation of the right kind may therefore play a central role in enabling companies to implement a policy of qualitative growth.

The conclusion of the above review of strategies by which a company would be able to survive and prosper within a self-imposed low-growth regime, not shared by its competitors, is that strategies 2 4 offer potential, but insufficient, solutions to the problem:

22 Biisincss S t r a Q y and the Environnient

Qualitntirw Growth and Complementa y Technology

1. Reduced costs. Cost reduction through the development of substitute technolog may be the necessary condition which allows a company to compete at all in the market, but it has little positive contribution to make to qualitative growth. Far from helping to enable a company to implement a successful qualitative growth strategy, i t may force it to maximise its growth to pay for the investment involved and to maintain turnover and added value. Increased yield. This is an important strategy, involving the development of complementary technologies. It may be unstable, and incapable of wide generalisation, (particularly in the absence of some form of regulation of the industry) but it may also have an enabling function for a qualitative growth shategy, and its potential merits further study. Regulation. This can play a critical role, by enabling a market for complementary technology to come into being.

2.

3.

The prospects for a company implementing a unilateral qualitative growth strategy are therefore mixed. To be successful in that regime, a company will probably need all thipe strategies - to protect the cost competitiveness of its basic technology, to enhance its yield and to benefit from some sort of regulation. Indeed, without some regulation, the attempt is likely to prove largely quixotic in any case, because it would have limited benefits for the environment: unilateral action by individual companies would simply open the way for other companies to increase their market share, with the result that there would be no overall change in the degree of environmental impact.

Does this mean that a unilateral S-L strategy would be pointless? Not necessarily, for two reasons. First, there may be a local environmental benefit. A national airline could, for instance, play its part limiting the growth in air and land traffic near a local airport. Secondly, there may be a significant indirect effect, since if a major company were to adopt such a strategy it would help to bring the issue into public debate.

As it happens, a major company has declared its commitment to a qualitative growth strategy. What can this teach us?

Part 111: Qualitative Growth in Practice: The Case of Swissair

Swissair ranks (by turnover) as the 16th largest airline in the world. It has a reputation for high quality in terms of both premium service and environmental performance. It has one of the youngest and most efficient fleets, with an average age of less than six years; it employs 19,000 people and in 1991 it camed 8 million passengers. A recent paper issued by Swissaix on its environment-business strategy stated the company's intention of implementing a 'qualitative growth' strategy:

Swissair has opted for qualitative growth: growth which, in quantity terms, will be well below the European and worldwide average. This policy will undoubtedly mean surrendering market share to competitors in certain areas.'"

I. Reasons for a Qualitative Growth Stra tegy in the Airline Industry

Until 1991, the airline industiy had enjoyed 45 years of uninterrupted growth, and it now represents some 4% of the total value of worldwide output. However, output in 1991 fell for the first time since comprehensive records began in the 1940s, and the aggregate loss made by the airlines in 1990 and 1991 was more than $10 billion. Pinfits recovered considerably in 1992, but underlying problems remain.

1. Overcapaci ty and Rising Costs

The airline industry has a long record of overcapacity and narrow profit margins. At the best of times, it is working to load factors of only 70%, and in periods of recession, this falls to 60% or less. Profit margins in the industry have been correspondingly low. Swissair's results were typical, with load factors averaging around 64% during the decade, and profits of between 1% and 2% of turnover.

There are four main reasons for the chronic overcapacity problem:

(a) The growth emphasis. At a time of high confidence in sustained growth there is a sense of financial security, which may prejudice the quality of financial decisions; overcapacity may be

Volrcmc 1, Niimbcr 4, Winter 1992 23

Qualitative Growth and ConiplirnentanJ Technology

seen as judicious provision for the future, an insurance against missing opportunities for growth. The principle of a self-reinforcing surge of growth, to which the housing market, stock market investment and lending to developing countries are prone, also affects the airlines. Distorted capital markets. The very high cost of aircraft (a new MD-11 costs $95 million) means that airlines are dependent on external funds for the purchase or lease of their fleet. The= has been intense competition among lessors for the airlines’ business and the airlines have been able to deploy capacity without meeting its full cost.” This has made it easier for manufacturers to sell aircraft to what seemed to be a healthy industry, blessed with permanent growth, but the result has been massive capital commitments and chronic unpiofitability, as excess capacity has forced down fares. Investing in environmental performance. As new designs have been developed, the environmental performance and the fuel economy of aircraft have improved, and leading airlines have systematically invested in the newest aircraft with the least environmental impact, selling their existing aircraft well before they are due for retirement. This has led directly to an oversupplied second-hand market, and to overcapacity. Markets at risk. There are some signs that the airline industiy is beginning to be vulnerable to the development of ’substitute products’, one of the forces in Porter’s model of competitive behaviour.” Teleconferencing, fax and computer networking have also made it easier to communicate at a distance. Teleworking - working at home and often as self-employed - is now more feasible and credible, but the self-employment that goes with it often means reduced travel budgets. Tourism patterns are changing, with a decline in the mass migrations to seaside holiday resorts, and a new awareness of the risks of sunbatlhg. Although sustained growth is predicted, these could all be read as signs that the potential for further expansion in the market in the developed countries is levelling off.

In addition to the overcapacity problem, operating costs have been rising. During the 19SOs, the airlines faced increases in the cost of fuel, labour, marketing, airport and air traffic control (ATC) charges, and finance. Capital needs for the world’s airlines are expected to total around $450 billion by the end of the present decade compai.ed with $147 billion in the ~ ~ S O S . ’ ~

In Swissair’s case, high personnel costs, late deliveiy of aircraft, diversification failures and low passenger traffic added up, in 1990, to a token pmfit for the airline of $3 million and a group loss of $16 million (recovering to profits of $33 million and $57 million in 1991).

2. Congestion and Air Traffic Control (ATC)

The air traffic contiol system has not grown as fasl as the traffic, and it is overloaded. The problem is partly due to inefficient organisation:“ the 23 countries that belong to the European Civil Aviation Conference have 51 control centres with equipment from 1s different manufacturers, 22 different computer systems and 33 programming languages.

Airlines feel the effects of this not only in increased charges, but in the costs of delays and a deteriorating service. Some 20% of all flights are delayed, owing to overcrowding of the air traffic control system, and it is expected to be at least a decade before the system has caught up with demand. This is essentially a technical, rather than an environmental, problem, but it means that further growth in the industry is likely to be associated with a worsening standard of service. In 1990, delays cost Swissair $72 million, and the company has had to dedicate its latest MD-81 aircraft as a spare, to allow for delays and improve punctuality.

3. Environmental Stress

It is now being recognised, as noted bi Part One, that the airline industry is not only a major source of greenhouse gases, but also that the deposition of these gases at high altitudes makes them particularly damaging. Aircraft already contribute eight times as much to the greenhouse effect as cars; neither this impact, nor their ozone-destmying NOx emissions, will be reduced by technological improvements if the industry continues its growth on the trend established over the last four decades.

Local impacts a k also pressing. For example, air traffic movements in the Zurich area have increased by 40% since 1980, and local opinion forced a referyndum on the ’moderation of air traffic‘ in the area.

~~~ ~~ ~

24 Brisincss Stmtegy and the Enazronriient

Qriulitutiue Growth and Complementary Technology

Although the referendum did not succeed, it is a reminder that local tolerance of air traffic movements, even with the new quieter engines, has i ts limits.

Swissair has responded to the environmental threat confronting it and its competitors with technical improvements including:

1.

2.

3.

4.

An environmental policy statement: This commits the company to make maximum use of technology and innovation to minimise the impact of the company’s activities upon the environment - even if this action entails major material and financial investment. Organisational structure. This includes an Environmental Steering Committee, linked to work groups covering virtually all aspects of the company’s operations, and headed by a member of the Executive Management and Head of the Engineering and Maintenance Division, which has its own Environmental Engineering Unit. Fuel- and eco-efficiency. The improvement in fuel efficiency has only been achieved at the cost of higher NOx emissions, so Swissair is now focusing on the technology of NOx reduction, and the purchase of the new Airbus engine in the mid 1990s will play an important part in that programme. Associated measures: centralised power supply for docked planes at Zurich (saving 12.3 million litres of kerosene annually); a programme to encourage staff and passengers to use the train to the airport rather than cars; a waste water treatment plant for effluent fmm the technical facility; an energy conservation programme for buildings and plant systems; separation and recycling of catering waste; and reduction of catering wastes.

This is a good record of environmental improvement. The measures are characteristic of those of the Golden Age: technology- and systems-based measures which can be implemented without prejudicing core business strategy and growth objectives. But it is unlikely to be enough. Damage to the ozone layer is an issue on which governments have shown they are willing to act decisively, and the airline industry could be confronted with regulations similar to those faced by the aerosols industry unless, by technology or by volume limitation, it reduces its environmental impact.

4. A Case for Volume Limitation?

Here, then, are powerful incentives for airlines to consider a radically revised corporate growth strategy. An industry with overcapacity, rising costs and a poor record of cost control, congestion in the air and on the ground, and a massive impact on the upper atmosphere, is well-placed to take the lead among industries in grasping the nettle of controlling volume of output. Indeed, it is conceivable that a standstill in output could be forced on the industry in the foreseeable future.

From the industry‘s perspective, the case against growth pales into insignificance in comparison with the imperative of a sustained growth rate. The accepted forecast is that industry will grow at around 6 per cent per annum over the next ten years and, as one airline commentator writes, ’Any sustained collapse in that growth would tear apart the industry’s alieady fragile economic^."^ In addition to the opportunity cost of forgoing growth, the cost of servicing their enormous capital commitments, and the stagnation crisis that would result, airlines must now face the additional problems of deregulation. The intention of liberalising the airline business is to stimulate competition, forcing the industry to provide a better, more cost-effective service. However, experience suggests that the effect of deregulation is to concentrate the indushy in the hands of a few mega-carriers. In the United States, the 19 medium to large-sized airlines of the late 1970s have been reduced to four, which account for over 80 per cent of the domestic market. Deregulation greatly increases the competitive advantage of large-scale operation in the industry. The cost of investment in environmental technology puts yet further pressure on airlines to grow; Swissair‘s management insists that the company’s acknowledged record in environmental performance has depended on the earnings derived from growth. For these reasons, it is scarcely surprising that Swissair’s qualitative growth strategy is unique among major airlines.

11. Implementation of the Strategy

Swissair’s implementation of its qualitative growth strategy will be described under the four headings defined in Part Two: (1) Increased sales, (2) Cost reductions, (3) Increased yield, and (4) Regulation.

Volume I , Nriniber 4, Winter 1992 25

Qualitative Growth and Complinientar~~ Tcchnology

1. Increased Sales

Swissair’s statement of its qualitative growth strategy speaks of growth well below the worldwide average (i.e. loss of market share). However, a paper describing its cooperation agreements with other airlines states:

[Swissair aims] to maintain the company’s independence and financial health, secure its long- term competitive edge, and consolidate its position in world air transport for the years ahead.

Strategic alliances with selected partner airlines a w a linchpin in all such endeavours. All these cooperation agreements are designed to maintain (and if possible expand) market share, and to improve productivity through shared resources and economies of scale.’6

This can be interpreted as follows: In addition to the economic pressure on airlines to grow in order to service their capital commitments, deregulation makes growth more desirable than ever. The only way in which Swissair can achieve economies of scale is by forging alliances with other airlines. The company recognises that, with the help of these alliances, it stands a better chance of maintaining its market share - but as the industry resumes its growth, this constant market share will take the form of an absolute increase in sales at the rate of increase prevailing in the industry as a whole. An increase in market share, giving a rate of growth higher than the industiy average, would be even better, and the company has to maintain a (growing) critical mass to finance its sustained improvements in eco-efficiency. There is no way in which this can be interpreted as a strategy of qualitative growth.

Swissair’s qualitative growth strategy, then, is at war with its business-development strategy. This illustrates the extreme difficulties of the qualitative growth agenda, and it underlines the real dilemma facing a company that has to reconcile environmental protec tion and business survival, once the safe synergies of the Golden Age can no longer be relied upon.

2. Reduced Costs

Swissair’s programme of operating cost reduction matches similar pmgramrnes being undertaken by almost all its competitors. The programme was designed to cut $250 million from operating costs during 1992, and it includes the formation of alliances, such as the European Quality Alliance, which amalgamates all customer services offices, including sales offices, airport sales desks and information points, in the home markets of each member of the alliance.

The Global Excellence Alliance will at first provide reciprocal reservation and ticketing services, and agreements on spare parts, technology and maintenance sharing, but it could have much deeper implications for the three airlines involved - Swissair, Delta and Singapore international Airlines. As described by Hwang Teng Aun, SIA’s senior vice president of the Americas:”

What we have effectively done is globalise our presence without being a mega-carrier. SIA can never be a mega-carrier in the British Airways or American [Airlines] sense. But through this alliance we can acquire a number of the mega-cairier’s manifestations.

In other words, the motivation is efficiency and business-building, a response to the tougher business conditions resulting from deregulation. A statement by Swissair’s Delta partner puts it more clearly:

It’s a way to try and generate more business and cultivate each other’s customer bases.”

The company’s cost rrduction programme, then, cannot be specifically associated with qualitative growth; moreover the part of the piagramme which involves pooling resources to save costs actually commits the airline to a conventional growth strategy.

3. Increased yield

An improvement in yield has to be a central objective for any airline; to achieve roughly the same net return, an airline needs to cut its overhead costs by 10 per cent, increase sales by 25 per cent, or

~

26 Biisinrss Strategy and the Environment

Qualitative Growth and Cotiiplrnientan~ Trchnology

improve yields by 5 per cent." Swissair has successfully increased its yield in terms of revenue per unit of output. In 1991, the recession depressed ptks by 5%, but passenger revenue rose by 8%, making a full 10% rise in yield on passenger business; the yield on freight also rose by 6%.

Swissair has a reputation for high quality service, and a relatively high proportion of its passenger seats are business or first class. This gives the airline the advantages of the premium business, but the handicap of that sector being vulnerable to fall in incomes. On balance, however, Swissair appears to be relatively well placed to increase its yield as the recession ends, owing to its strength in the premium market; this could be a substantial advantage for the company if it were actually to implement its declared policy of qualitative growth.

4. Regulation

Although there is debate on the case for slowing or halting the growth of air traffic to control emissions, the trend of current policies is in the opposite direction. Deregulation provides the most hostile possible environment for a policy of qualitative growth.

Conclusions

This article has argued that the environmental benefits of technological advance will be overtaken by growth, and that this sets a new agenda: to address the environment issue effectively it is necessary to develop strategies for managing (i.e. suppressing or even reversing) growth. Yet on an economy-wide scale, a suppressed-growth policy would lead to economic and social problems for which there are at piesent no solutions, so positive growth remains, for good reasons, the consensus objective of policy-makers.

The article considered the implications of a growth-reduced policy implemented by a company. It found that a strategy based on high-yielding premium business may, in principle, and in the shorter term at least, offer a feasible policy for an individual company, but the scope for extending it to a whole industry is not proven.

The qualitative growth strategy was illustrated with the case of the airline industry, and of Swissair in particular, which has declaied a policy of keeping growth to a level well below that of its competitors. On examination, Swissair's policy statements are contradictory, arguing variously for moderate growth at the cost of market share, and for a strategy of increasing market share if possible. It was also shown that, apart from Swissair's existing emphasis on premium business, nothing in the company's implemented strategy is specifically associated with qualitative growth. Nonetheless, the fact that Swissair has articulated the qualitative growth objective (even if far from consistently) does give the concept a business reality which it would not otherwise have, and it suggests that one airline is at least making preparations to address the dilemma of growth and environmental impact.

Two overall, if tentative, conclusions arise with relevance for business strategy and government industrial policy alike. First, we should be giving serious thought to the development of two different types of technology: (a) substitute technology, using advanced systems to meet demand with drastically reduced environmental impact (i.e. the type of technology that is being intensively developed at the present time), along with (b) complementary technology, using labour intensive methods to provide highly differpntiated, high-sewice output, addressing the issue of unemployment, which is every bit as pressing to households and indushy alike as that of environmental damage. This raises numerous problems of income distribution, taxation and transfer payments; however, the concept of complementary technology is central, since it offers, in principle, a partial solution the Growth Enigma. Complementaiy technology, as discussed in this paper, experiences a low or even negligible rate of improvement in productivity. Hence, to the extent that the economy consists of a successful complementary sector, full employment does not depend on continuous growth. Improvements in living standards can be supplied by technical advance in the substitute technology sector, while employment shaken out by that sector shifts into the complementary sector. To some extent this has already been recognised in the growth of the service industries, but the transformation has been insignificant because the services have been just as open to technological advance as the production industries. The major potential importance of the complementary sector in the sustainable economy now needs to be recognised in economic policy and business strategy.

~~ ~

Volrinie 1, Number 4, Wznfer 1992 27

Q u a1 i ta tive Growth and Co inp 1 i m en tu ry Tech nolopj

To make proper use of the potential of the complementary sector, with all the problems associated with it which have been acknowledged in this piece, will, of course, require a new research agenda on the feasibility of a solution of this type. But it will also call for some form of government coopera tion. The second overall conclusion then, is that responsibility lies with government to develop, not just an industrial strategy, but a green-industrial strategy. Government is an indispensable actor in business-environment policy. As the current Golden Age of environmental policy begins to age and tarnish, there will be severely reduced opportunity for uncoordinated corporate action to protect the ecosystem, which is the industrial infrastructure that really matters.

Acknowledgements

I would like to thank Mr Willi Schurter (Head of Swissair's Engineering and Maintenance Division, and Chairman of the Environment Steering Committee) for information about the company's qualitative growth strategy.

Notes and References

1. The environmental performance of the UK economy as a whole has followed a path which fits the notion of a composite industry: to quote just one indicator, between 1950 and 1991, the energy ratio (the ratio of primary energy demand to GNP) fell by 40%. (Department of Trade and Industiy, Digest of United Kingdorn Statistics, 1992).

2. In reality, the rates of growth in the airline industry are far greater (between double and quadruple) those shown in the model; however, the airlines' rate of growth is exceptional and the intention at this stage in the piece to set up a general framework rather than model a specific indushy. The rates if growth shown in the model are conceytud and not intended as an exact account of the growth rates experienced in the UK or other developed economies.

3. The airline perfoimance statistics are derived hom Rigas Dogarnis (1991), Flying OffCorrrse, Harper Collins, second edition.

4. In fact, the output of the air transport industry grew fourfold during this period. 5. On the evidence so far, this is in fact an overgenerous description of the Golden Age. Emissions

overall are still rising in the developed countries, although dates for the phase-out or stabilisation of key pollutants such as CFCs and COz have been set by UN or EC policy.

6. Douglas Cameron, 'No Smoke Without Fire', Airline Biisiness, Sept 1992, pp.86-88. 7. Mark Barrett, (1991) Aircraj? Polliltion: Environnrcntal lniyacts and Future Solutions, MrwF Research

Paper. 8. Baumol, W.J., (1967) 'The Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis',

Aniencan Economic Review, June, Vo1.57, pp.515426. 9. This example does not, of course, sit easily with the claim that TNP output tends to have a low

environmental impact, except in the sense that THE labour concerned produces a small number of cars; in the mainstream industry, each person employed would be many times as productive, with correspondingly greater environmental impact.

10. Swissair ref Standard 9.le. 11. Trevor French, 'Lend Less, Spend Less', Airline Biisiness: The Skies 1992, yp.34-37. 12. Michael Porter, Competitive Strategy, The Five Press, 1980. 13. Douglas Cameron, (1992) 'The Balancing Act', Airline Birsincss: Tlzc Skies 1992. 14. Tim Jackson, 'Air-Traffic Control Calling: Sony the Sky is Full', Tlie Independent, 10/8/92, p.14. 15. Douglas Cameron, 'No Smoke Without Fire' (1992), op.n't. 16. Paul Maximilian Muller, member of Executive Management and Head of External Relations,

'Working Together for Continued Success: Swissair's Cooperation Agreements with Other Airlines', ref Standard 10.2e, Februaiy 1992.

17. Mead Jennings, (1991) 'Still Going Global', Airline Business, August, pp.4042. 18. Jennhgs (1991), 0p.cit. 19. Philip Shearman, 'Costs and Yields', Airline Business: The Skies in 1992, pp.17-21.

28 Business Strategj and the Environment