Business Model Innovation and Sustainability Transitions (Matthew J. Hannon)

A post by Dr. Matthew J. Hannon,  Centre for Environmental Policy, Imperial College London.

Setting the Scene

There is a growing consensus that many of the current systems we rely on to satisfy our human needs (e.g. comfort, mobility, nutrition etc.) are fundamentally unsustainable. Consequently, there is a pressing need to both swiftly and radically reconfigure these systems to ensure that the human population is able to continue to satisfy these needs. Traditionally scholars and policymakers have predominantly looked towards technological innovation as a solution to this challenge (Holtz et al., 2008; Edquist, 2005). Whilst few dispute the key role this will play in supporting sustainable development, it has only been in recent years that a growing number of scholars have explored the potentially important role non-technological innovation could play in driving forward sustainability transitions (Steward, 2008; Steward, 2012; Witkamp et al., 2011; Bergman et al., 2010; Edquist, 2005). This group of innovation constitutes a ‘broad church’ and is generally thought to encompass any form of innovation that does not revolve around technological artefacts (Witkamp et al., 2011), e.g. new organisational structures, governance arrangements or behavioural norms. However, one form of non-technological innovation has in particular begun to attract significant attention as a potentially important driver of system change: business model innovation (BMI) (cf. Boons et al., 2013; Boons & Lüdeke-Freund, 2013).

Key Research Findings

At present we possess a poor understanding of the role that the development and implementation of innovative BMs could play in facilitating transitions to sustainable socio-technical systems. To help address this the author’s thesis (Hannon, 2012) and a forthcoming article in Energy Policy (Hannon et al., 2013) examined the application of the novel Energy Service Company (ESCo) business model in the UK energy system. The ESCo model is designed to reward businesses by satisfying consumers’ energy needs at less cost and with fewer carbon emissions via energy demand management and/or sustainable supply measures. In contrast, the revenue of the incumbent Energy Utility Company (EUCo) model is coupled with the sale of units of energy, which are predominantly sourced from fossil fuels. The latter is currently dominant in the UK.

Specifically, the research investigates the co-evolutionary relationship between a population of organisations practicing the innovative Energy Service Company (ESCo) business model and the various dimensions of the broader UK energy system: environment, user practices, technology, institutions and incumbent BMs. The aim of this research was to identify the ways in which the UK ESCo population has not only been shaped by the wider UK energy system but has in turn shaped change within the UK energy system, in order to provide valuable insight into how the ESCo model is likely to influence energy system change in the future. The key findings of this research are as follows:

  • Poor fitness of BMs responsible for poor uptake – Low level of uptake of sustainable BMs can be attributed to the mismatch between the characteristics of these models and the prevailing selection environment of the dominant socio-technical system. The ‘fitness’ between many existing novel, sustainable BMs (e.g. ESCo model) and their selection environment must improve in order for them to proliferate. This could be achieved via a major reconfiguration of the wider socio-technical system and/or a redesign of these BMs.
  • BMs can serve to maintain or disrupt the status quo – BMs are capable of sharing a co-evolutionary relationship with the various key dimensions of the UK energy system. This indicates that BMs are not only shaped by their broader environment but can in turn shape their environment, lending support to the claim that innovative business models can drive system change and potentially accelerate sustainability transitions. Conversely, this coevolutionary relationship can also mean that the application of unsustainable, incumbent BMs has the potential to shape the broader socio-technical environment in such a way that reinforces the dominance of the prevailing socio-technical system, which are typically unsustainable at present.
  • BMs subject to positive feedbacks & ‘lock-in’ – This research indicates that, in a similar manner to technologies (Arthur, 1989) and institutions (North, 1990; Pierson, 2000), sustainable business models (e.g. ESCo model) are also subject to positive feedbacks, i.e. ‘the tendency for that which is ahead to get further ahead’ and ‘that which loses advantage[, loses] further advantage’ (Arthur, 1996 p. 100). With respect to our case study, this manifested itself as a ‘locking-in’ of the incumbent Energy Utility (EUCo) model and the ‘locking-out’ of the novel ESCo model. This dynamic will be extremely difficult to reverse due to the multitude of positive feedback mechanisms at play, however our research indicates that already some positive feedbacks mechanisms are serving to ‘lock-in’ the ESCo model. Therefore, we argue that ‘lock-in’ can serve to both enable and constrain the uptake of sustainable BMs.
  • Incumbent organisations could help promote novel, sustainable BMs – Whilst the emergence of firms practicing novel, sustainable BMs generally represents a threat to the dominant position of incumbent organisations (e.g. Energy Utilities in the UK), these organisations may in fact also look to adopt some or all aspects of these novel business models (cf. Hockerts & Wüstenhagen’s (2010) “Davids” and “Goliaths”). This maybe on account of their perception that their environment is undergoing radical change and that they too must adapt their own BM in order to reposition themselves and continue to thrive in the future – ‘innovate or die’. However, it is often challenging for incumbent organisations to adopt radically new BMs, for example due to entrenched institutional norms within their organisation that are misaligned with the new BM or a lack of key resources required to operate the model (e.g. skills).
  • BMI is possible in heavily regulated industries – Much of the research into BMI has so far focused on sectors that are not subject to a great deal of regulation, such as the classic cases of Apple and the music industry (Johnson, 2010), as well as Xerox and the photocopying industry (Chesbrough, 2010). In contrast the UK energy sector represents a heavily regulated industry. Interestingly, this research finds that the emergence and application of innovative business models is also possible in a highly regulated environment and that regulation has both served to support and inhibit the uptake of the ESCo models. This highlights the importance of designing government policy in such a way that is sensitive to BMI.

The Need for Further Research

The above findings provide some valuable ‘food for thought’ in relation to the role innovative, sustainable business models could potentially play in sustainability transitions. However, these findings are drawn from only a single in-depth case study and there is consequently a need for further research that examines the emergence of other types of novel, sustainable BM in different sectors to help validate these. For example, research might examine the application of use-oriented (e.g. car leasing, pooling and sharing schemes) and result-oriented (e.g. ‘pay-per-km’) business models for transportation, exploring how these have fared in comparison to the product-oriented ‘Fordism’ business model employed by the majority of the major vehicle manufacturers (e.g. General Motors, VW, Nissan etc) and the potential for these novel business models to shape the future transport sector over the coming years (cf. Wells, 2008).

Finally, there is not only a need for more ‘blue sky thinking’ around the types of business model that could satisfy our needs in a sustainable manner but also a more in-depth analysis of the sustainability credentials of business models, using a robust set of metrics to identify the extent to which a firm’s business model can be considered sustainable. Such analysis will be important to identify the types of business models that are capable of promoting sustainable development and in turn, those that should be subject to further research in order to understand how we might support their wide-scale uptake.

References

Arthur, W. (1989): Competing technologies, increasing returns, and lock-in by historical events, Economic Journal, Vol. 99, pp. 116-131.

Arthur, W. (1996): Increasing Returns and the New World of Business, Harvard Business Review, Vol. 74, pp. 100-109.

Bergman, N.; Markusson, N.; Connor, P.; Middlemiss, L. & Ricci, M. (2010): Bottom-up, social innovation for addressing climate change. Oxford: Oxford University, Environmental Change Institute.

Boons, F. & Lüdeke-Freund, F. (2013): Business Models for Sustainable Innovation: State-of-the-Art and Steps towards a Research Agenda, Journal of Cleaner Production, Vol. 45, pp. 9-19.

Boons, F.; Montalvo, C.; Quist, J. & Wagner, M. (2013): Sustainable innovation, business models and economic performance: an overview, Journal of Cleaner Production, Vol. 45, pp. 1-8.

Chesbrough, H. (2010): Business Model Innovation: Opportunities and Barriers, Long Range Planning, Vol. 43, No. 2/3, pp. 354-363.

Edquist, C. (2005): Systems of Innovation: Perspectives and Challenges, in: Fagerberg, J.; Mowery, D. C. & Nelson, R. (Eds.): The Oxford Handbook of Innovation. Oxford: Oxford Univeristy Press, pp. 181-209.

Hannon, M. (2012): Co-evolution of innovative business models and sustainability transitions: The case of the Energy Service Company (ESCo) model and the UK energy system. PhD thesis. Leeds: University of Leeds.

Hannon, M.; Foxon, T. & Gale, W. (2013): The co-evolutionary relationship between Energy Service Companies and the UK energy system: Implications for a low-carbon transition, Energy Policy, online first 10 July 2013.

Hockerts, K. & Wüstenhagen, R. (2010): Greening Goliaths versus emerging Davids — Theorizing about the role of incumbents and new entrants in sustainable entrepreneurship, Journal of Business Venturing, Vol. 25, No. 5, pp. 481-492.

Holtz, G.; Brugnach, M. & Pahl-Wostl, C. (2008): Specifying “regime” — A framework for defining and describing regimes in transition research, Technological Forecasting and Social Change, Vol. 75, pp. 623-643.

Johnson, M. (2010): Seizing the White Space: Business Model Innovation for Growth and Renewal. Boston: Harvard Business Press.

North, D. (1990): Institutions, Institutional change and Economic Performance. Cambridge: Cambridge University Press.

Pierson, P. (2000): Increasing returns, path dependence, and the study of politics, American Political Science Review, Vol. 94, pp. 251-267.

Steward, F. (2008): Breaking the boundaries: Transformative innovation for the global good. London: NESTA.

Steward, F. (2012): Transformative innovation policy to meet the challenge of climate change: Sociotechnical networks aligned with consumption and end-use as new transition arenas for a low-carbon society or green economy, Technology Analysis & Strategic Management, Vol. 24, pp. 331-343.

Wells, P. (2008): Alternative business models for a sustainable automotive industry, in: Tukker, A.; Charter, M.; Vezzoli, C.; Stø, E. & Andersen, M. (Eds.): Perspectives on radical changes to sustainable consumption and production. System Innovation for Sustainability. Sheffield: Greenleaf, pp. 80-98.

Witkamp, M.; Raven, R. & Royakkers, L. (2011): Strategic niche management of social innovations: The case of social entrepreneurship, Technology Analysis & Strategic Management, Vol. 23, pp. 667-681.

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