Building sustainable cities

Harvard Business Review

July – August 2013

By 2050 the number of people living in cities will have nearly doubled, from 3.6 billion in 2011 to more than 6 billion. Yet the world’s urban areas are already overcrowded and, particularly in developing countries, suffer from shortages of clean water, electricity, and other resources essential to the support of their exploding populations and fragile economies.

The problems created by rampant urbanization are among the most important challenges of our time. They also represent one of the greatest opportunities—and responsibilities—for the private sector. Business is uniquely positioned to shape the sustainable, economically competitive cities of the future.

Many corporations and investors assume that fixing cities is the purview of government, and that government will act. But governments around the world are stuck—financially, politically, or both. They can’t be relied on to single-handedly address the problems of urbanization or to conceive solutions, such as efficient electrification and reliable public transit, that will drive economic growth. Implementing those solutions requires large amounts of capital, exceptional managerial skill, and significant alignment of interests—all of which are often in short supply in city governments but abound in the private sector.

In my research and in consulting engagements with municipal governments, urban planners, corporations, and entrepreneurs in the United States, Europe, Latin America, and Asia, I have seen many different business strategies for addressing the challenges posed by rapid urbanization and scarce resources. Often they center on expanding supply—providing more water, more electricity, more roads, more vehicles. But increasingly businesses are discovering how to create and claim value by improving resource efficiency—through energy-performance contracting, for example, and other strategies that overcome business barriers, reduce waste, and stretch resources. This article provides a framework for identifying and pursuing such opportunities.

The framework rests on three pillars: new business models that generate profits by optimizing the use of resources; financial engineering that encourages investments in efficiency (see the sidebar “What Is Financial Engineering?”); and careful selection of markets. Although any given company’s approach will depend on its capabilities and objectives and the market it is entering, the broad strategies provided here are relevant both to obvious players such as infrastructure companies and vendors of turbines, trains, and other equipment, and to companies in larger sectors such as information technology, financial services, and building products. Whatever the industry, strategic investments in resource efficiency as cities are being built or rebuilt can generate value for companies over the long term while enhancing the cities’ competitiveness, livability, and environmental performance.

A company or an investor could target an array of resource-management initiatives. Of these, I argue, water, electricity, and transit projects deserve the greatest focus. Businesses that have water to process food and materials, whose lights and computers are reliably powered, and whose goods can get to market and employees can get to work quickly and efficiently are clearly at an advantage. Similarly, citizens with ready access to clean water, whose children have light by which to read and study, and who can commute efficiently and affordably have a foundation on which to thrive. All the other services a competitive city provides—functional housing, schools, hospitals, stores, police and fire departments, heating, cooling, waste management, and so on—depend on a reliable water, electricity, and transit infrastructure.

The Efficiency Opportunity

To understand where the opportunity lies, consider how resource-efficiency initiatives measure up on both technological and financial sophistication. The products and services that new cities will require, and that provide the return investors and entrepreneurs need, optimize both. A company’s offerings can be positioned according to these characteristics on an “efficiency matrix.” Technological sophistication increases from left to right, while financial sophistication increases from bottom to top. Low-tech commodity solutions, such as the purchase of insulation in a simple transaction between buyer and seller, would inhabit the bottom left quadrant; sophisticated programs such as demand-response optimization in electricity would inhabit the top right.

The matrix is useful for determining the current strategic position of a company’s products, services, and investments, but it’s most valuable for envisioning where the company might profitably head. New value can be created and captured by moving either horizontally or vertically within any quadrant. However, companies that shift their business models and offerings into the upper right quadrant stand to gain the most—and will also have the greatest impact on the resource needs of the world’s burgeoning cities. Often that means playing the role of coordinator or figuring out how to finance a service—something the individual players cannot do on their own. It is in that quadrant that a company’s offerings are more differentiated, favor multiparty solutions, and are likeliest to create value for all the participants.
Original article can be found online
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