Hermes Microtech Inc.: A New MBA Case and Teaching Module on Entrepreneurial Leadership and Systems Innovation in

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Hermes Microtech Inc.A New MBA Case and
Teaching Module on Entrepreneurial Leadership and
Systems Innovation in Greening Buildingsfrom
Darden Business School

• Chris Lotspeich
• Second Hill Group
• WRI BELL Conference
• 1819 July 2003
• Fort Lauderdale, FL

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Batten Fellowship
Second Hill Group

• The Batten Institute at Darden at UVA
• Chris a visiting Batten Fellow 20022003
• Sponsor Prof. Andrea Larson
• MBA module based on consulting experience

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MBA Teaching Module
Second Hill Group

• Article on systems innovation theory
• Fictional case on implementation challenges
• Champion greening company facilities
• Change strategies organizational dynamics
• Two technical notes
• Whole-systems design management
• LEED green building rating system

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Topical Overview
Second Hill Group

• Systems innovation and entrepreneurship
• Greening facilities can improve companies
• Green building strategies
• Overcoming obstacles to implementation

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Systems Innovation Article
Second Hill Group

• System dynamics of economy environment
• Small factors cause big system changes
• Economic activity degrades ecosystems
• Transition to sustainable system condition

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Entrepreneurship and Innovation
Second Hill Group

• Schumpeterian creative destruction
• Entrepreneurs have new vision of the future
• Harness resources to realize their vision
• Innovate new methods, products, processes

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Systems Innovation
Second Hill Group

• Organizational systems produce technical systems
• Design-build process makes buildings
• Entrepreneur innovates systemic change
• Coordinates incremental changes at leverage
  points
• Creates big changes in both system outcome
• Organizational learning via product improvement

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Greening Facilities A Good First Step
Second Hill Group

• Every business uses buildings, pays overhead
  costs
• The design-build-operate process is wasteful
• Proven improvements are well understood
• Learning integrates many functions and
  disciplines
• Early wins free resources, build buy-in

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Green Building Benefits
Second Hill Group

• Healthier indoor outdoor environments
• Cost reductions
• Capital costs can be same or lower
• Operating cost reductions typically 50
• Potential labor productivity increases
• Promotes innovation

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LEED Rating System Tech Note
Second Hill Group

• Voluntary standard of US Green Building Council
• Industry-wide stakeholder association
• Power to transform market
• Defines green based on accepted best practices
• Flexible menu of opportunities
• Promotes innovation, economy
• Credible third-party certification

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Resource Efficiency Strategies
Second Hill Group

• Integrated, whole-systems design
• Big savings can cost less than small ones
• Appropriate technology
• Low-impact materials and energy use
• Management Techniques
• Money, information, organizational behavior

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End-Use, Least-Cost Analysis
Second Hill Group

• Historical supply-side focus How to get more
  resources?
• But users want end-use services, not resources
• Hot showers, cold beer, light, comfort, torque
• not oil , electricity, wood, etc.
• Demand-side focus what is the least expensive,
  least polluting way to deliver those services?

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Whole-Systems Design Approach
Second Hill Group

• Life-Cycle Analysis (LCA), total cost of
  ownership
• Consider interactions and synergies
• Compounding leverage of downstream savings
• Charrette stakeholder group design process

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The Leverage of Downstream Savings
Second Hill Group
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Building The Business Case
Second Hill Group

• Use total cost of ownership
• Capital and operating costs
• Credit savings from reduced infrastructure
• Turn cost centers into profit centers
• Cost reductions add directly to bottom line
• Less risk, more return than earning on sales
  margin
• Investment criteria Payback vs. ROI

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Payback vs. Return On Investment
Second Hill Group

• Payback period calculation is the inverse of ROI
• Capital asset ROI criteria based on marginal cost
  of capital
• 15 COC 7 year payback
• Most retrofit investments capped at 2-year
  payback period
• 2-year payback 50 annual ROI
• Bias vs energy efficiency, not a level playing
  field
• Asking efficiency to pay gt3? more than COC hurts
  profits

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Prioritization by Simple Payback
Second Hill Group
Source EPA Energy Star Small Business Guide
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Common Obstacles to Efficiency
Second Hill Group

• Disincentives, split incentives and perverse
  incentives
• Lack of information
• Capital misallocation
• Organizational behavior

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Differing Incentives in Building (I)
Second Hill Group

• Consider the owner, architect, builder, and
  tenant
• Owner May not know about efficient methods
• If he doesnt ask for efficiency, he wont get it
• Architect Not trained in resource-efficient
  techniques, and not asked to prioritize them
• No incentive to work harder and argue for
  efficiency
• Traditionally, architects and engineers are
  compensated for what they spend, not what they
  save

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Differing Incentives in Building (II)
Second Hill Group

• Contractor Wants maximum profit from his bid
• Hes rewarded for the lowest bid, and wont pay
  the bills
• Incentive to install cheap (and inefficient)
  equipment
• Electric heaters, inefficient fridge,
  incandescent bulbs...
• Tenant Had no say, and is stuck with the bills

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Improving Building Efficiency
Second Hill Group

• Increase awareness of efficient techniques
• Specify building performance, efficiency
• Performance-based fees
• Reward the architect for what she saves
• Integrated design workshop, or charrette
• All involved meet with experts to optimize the
  design
• Share savings with building energy managers

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Hermes Microtech Case Study
Second Hill Group

• CEO and VP of EHS want green building
• Young manager tasked with implementation
• Has CEO support, but not full authority over
  project
• Consider lessons of prior efforts, consultant
  input
• Assess goals incentives of process participants
• What should be her strategy for new project?

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Hermes Dramatis Personae
Second Hill Group

• CEO
• VP of Production Department
• VP of Environment and Facilities Department
• Special Assistant to VP of Environment
  Facilities (protagonist)
• Comptroller

• Construction Manager from Production Dept
• Product Engineer from Facilities Division
• Site Facilities Director
• Architect vendor
• Construction vendor
• Green building NGO consultant
• Green engineering consultant

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Hermes Organizational Chart
Second Hill Group
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Second Hill Group
For More Information

• The Batten Institute and the Darden School
  (www.darden.virginia.edu/batten)
• Rocky Mountain Institute (www.rmi.org)
• Contact the author
• Chris Lotspeich
• Principal, Second Hill Group
• 37 Majus Dr, Coventry, CT 06238 USA
• Tel [phone]
• E-mail chrislot_at_secondhill.com

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Second Hill Group
Payback vs ROI Appendix
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Return on Investment (ROI)
Second Hill Group

• Many capital investments assessed in terms of ROI
• Department of Energy method
• CA Annual energy cost after implementation
• CB Annual energy cost before implementation
• CI Cost of implementation
• Annual return on investment (ROI), expressed as
  a percentage
• CB CA
• CI
• (This approach ignores certain tax effects and
  depreciation)

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Simple Payback
Second Hill Group

• Payback period calculation is the inverse of ROI,
  where
• CA Annual energy cost after implementation
• CB Annual energy cost before implementation
• CI Cost of implementation
• Simple payback, expressed as the number of years
  needed to recover costs
• CI__
• CB CA
• (This approach ignores certain tax effects and
  depreciation)