Why are business models important for sustainability innovations? Because they are “the flexible thing in the middle”!

During my PhD defense one of my supervisors (to whom I am really thankful!) asked this question:

Okay, what you are saying is that business models are the ‘flexible thing in the middle,’ and that’s why they are important for the success of sustainability innovations. So, that’s all?

Um, yes.

Hm.

To be honest, I was surprised (to be really honest, I was shocked). To me, this was the obvious way to summarize the results of my PhD research which focused on how business models can support sustainability innovations in general and solar PV in particular. Thinking about this experience, I realise that this question showed that my supervisor followed my argumentation to some degree, but needed some more convincing, i.e. clear, arguments to fully buy the story.

This was an important lesson about the importance of clear and persuasive scientific communication. So, I will try to tell the story of “business models for sustainability innovation” as straightforward as possible in this blog post.

1. “Business models for sustainability innovation” – Major issues

My dissertation framework paper deals with three major issues: sustainable entrepreneurs’ need to create business cases with innovations; barriers to commercialisation success with sustainability innovations; and the role of business models in overcoming these barriers. Since sustainable entrepreneurship and sustainability innovation have been thoroughly discussed (e.g. Hockerts & Wüstenhagen, 2010; Schaltegger & Wagner, 2011) the focus shall be on the following two issues:

  • What are the most important barriers to the commercialisation of sustainability innovations?
  • Which role can business models play in overcoming these barriers?

2. Barriers to the commercialisation of sustainability innovations

The framework paper takes a “Teecian” perspective (cf. Teece, 1986) and provides a systematic review of the major barriers to profiting from innovation (PFI) in a Teecian sense and extends this perspective to provide a systematic view on barriers to profiting from sustainability innovation. The result of this review is summarized in Table 1.

The commercialisation of innovations, be it mainstream consumables like Smartphones or radical system innovations like an e-mobility infrastructure, confronts innovators with diverse challenges, from identifying customer segments and their needs through production up-scaling to capturing a fair share of the profits. In this context, Teece identified a fundamental dilemma: it is often not the innovator, i.e. the first mover who introduces a new process, product, or service, who profits most from an innovation, but suppliers, co-operators, customers, and competitors. He developed the PFI framework to explain how strategic positioning together with internal (e.g. the innovator’s asset structure) and external (e.g. the number of suppliers) factors influence the ability to capture value from an innovation. The most important Teecian barriers are conceptualized as (Teece, 1986, 2006):

  1. Appropriability regime
  2. Dominant design
  3. Complementary assets

While these challenges can be regarded as universally valid, profiting from sustainability innovation is confronted with specific problems resulting from the deliberate aspiration to co-create economic, social, and ecological value (cf. Boons, 2009; Cohen & Winn, 2007; Hansen et al., 2009; Hockerts & Wüstenhagen, 2010).

Besides material problems such as cost disadvantages from the deliberate internalisation of societal costs and the multi-dimensionality of socio-ecological problems, the concept of sustainability innovation itself is problematic. As an example, while the majority of customers should be able to agree on the most comfortable and desirable Smartphone, agreeing on the most sustainable one would be much more difficult. Boons et al. (2013) frame this problem as spatial, temporal, and cultural embeddedness, which leads to different context-specific meanings of sustainable development and sustainability. Beyond this fundamental problem of meaning the review brought up further sustainability innovation barriers (Table 1):

  1. Discursive ambiguity
  2. Methodological constraints
  3. Directional risks
  4. Radical innovation
  5. System-level change
  6. Double externality problem

[-> More details and the complete review can be found in section 2.2 of the framework paper.]

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3. The importance of business models for sustainability innovations – “The flexible thing in the middle”

With regard to the Teecian challenges of appropriating economic value from innovation, a plethora of reasons for dealing with business models and business model innovation can be found in the literature (e.g. in two Long Range Planning special issues, 2010 and 2013, or two Harvard Business Review collections published in 2010 and 2011). Chesbrough boils it down:

The economic value of a technology remains latent until it is commercialized in some way via a business model. The same technology commercialized in two different ways will yield two different returns. (Chesbrough, 2010, p. 354)

Going beyond economic value and technological innovation in a narrow sense, the question is how can business models unlock and leverage the latent sustainability potential of innovations, i.e. how does it mediate between sustainability innovations and business cases for sustainability?

Answering this question requires two steps:

  • The first step is to understand the socially constructed nature of business models which allows for the fulfillment of particular functions, such as intermediation.
  • The second step is to identify the intermediating function as an essential prerequisite for the commercialisation of sustainability innovations, i.e. overcoming the above mentioned barriers.

3.1 Understanding the “business-model-as-construct”

The business model can basically be understood as an artificial construct which can assume the form of a verbal definition, diagram, concept, or complex framework. Fletcher (2006) defines the term social construction as

shared processes and negotiated understandings in which people engage to create meaning. (p. 426)

And Mallon (2008) states

that the core idea of constructionism is that some social agent produces or controls some object … [by] intentional activity, engaged in step-by-step fashion, producing a designed, artifactual product. (p. 5)

Central to the constructivist view are shared processes of sense-making and the relationships between objects, for example a company, and the constructs derived from these objects, for example the behavioural role of a CEO (social construct) or a balance sheet (artifactual construct). The business-model-as-construct is derived and merged from different organisational, technological, and social objects within an organisation and its environment. It depends on a constitutive relationship between social agents who deal with it, for example product developers and marketing experts, and the constructs and representations they use to facilitate their social interaction (cf. Mallon, 2008). It follows that creating and sharing business model constructs and representations is equivalent to their constitution. Otherwise, they would remain pure mental models in social agents’ minds without any real function and impact (cf. Doganova & Eyquem-Renault, 2009).

A crucial function assigned to the business-model-as-construct can be described as alignment or (inter-)mediation (cf. Al-Debei & Avison 2010). This function mediates between different parts and facets of an organisation, the technologies (in a wider sense, innovations) it employs and its environment. The most prominent description of this function can be found in Chesbrough and Rosenbloom’s (2002) seminal article on Xerox Corporation’s technology spin-offs. They find that

[t]he business model provides a coherent framework that takes technological characteristics and potentials as inputs, and converts them through customers and markets into economic outputs. The business model is thus conceived as a focusing device that mediates between technology development and economic value creation. (p. 532)

Figure 1 illustrates this view.

2

While mainstream technology entrepreneurs use their business models to optimise the ratio of technical inputs and economic outputs, sustainable entrepreneurs aim for multiple outcomes in terms of solutions to societal problems; but they often face limited resources. For example, bio-pioneers of organic textiles had to develop new supply chains to gain access to alternative feedstock sources, manufacturing capacities, and management competencies (Hansen & Schaltegger, 2013). Social entrepreneurs in developing countries are faced with diverse scarcities such as a lack of production inputs, business competencies, or institutional settings (Sánchez & Ricart, 2010; Seelos & Mair, 2005; Seelos, 2013). Such context-specific problems add to the above mentioned challenges of profiting from sustainability innovation.

[-> An in-depth discussion of these aspects can be found in section 2.3 of the framework paper.]

3.2 The “business models for sustainability innovation” framework

The business models for sustainability innovation (BMfSI) framework and related publications are built upon the business-model-as-construct and its mediating function. The framework serves primarily theoretical and research purposes. Its value lies in its generic quality and the horizontally and vertically structured relationships between the different concepts of innovation, business model, and corporate sustainability research.

3

The horizontal main axis connects the three major concepts underlying this framework: sustainable entrepreneurs pursue corporate sustainability mainly through the creation of business cases for sustainability (right-hand side of Figure 2). Sustainability innovation is seen as a major approach in creating business cases (left-hand side of Figure 2). The framework is based on the assumption that the mediating function of the “business-model-as-construct” can support the commercialisation of sustainability innovations (centre of Figure 2), which is expected to be a pivotal strategy to create and extend innovation-based business case opportunities (cf. Schaltegger & Wagner, 2011).

The vertical main axis connects the company level with the external business environment. The dashed line indicates that a strict separation between these two levels is impossible due to various overlaps and exchange relationships (e.g. with suppliers, competitors and further stakeholders, regulatory influences, and dependencies on complementary assets) as well as the fact that corporate sustainability activities are by definition not limited to the company level. Sustainability innovations and business cases for sustainability are expected to unfold effects beyond corporate boundaries. However, for reasons of analytical clarity, the three major concepts constituting the horizontal axis of the BMfSI framework are assigned to the company level where they are primarily managed.

When describing the business model’s mediating function, many authors point to the importance of company-environment relationships (cf. Al-Debei & Avison, 2010; Chesbrough & Rosenbloom, 2002; Osterwalder, 2004). Figure 2 highlights two aspects from the business environment: the critical role of public policies and financing for sustainable entrepreneurs and their innovations (cf. Boons et al., 2013; Cohen & Winn, 2007; Hockerts & Wüstenhagen, 2010). While the business environment exerts influence in a lot more ways, e.g. through market competition, industry dynamics and trends, or its overall munificence (cf. Sánchez & Ricart, 2010), supportive public policies and the availability of financial capital are two crucial preconditions for commercial success with sustainability innovations (besides sufficient demand side potential), as shown for example by a wide range of studies on renewable energy technologies or recent studies on business model innovation for green growth (Beltramello et al., 2013; Bisgaard et al., 2012).

Figure 2 defines four main framework interfaces, two of which should be relevant for most research on sustainability innovation, business models, and business cases: the sustainability innovation and business case for sustainability interfaces (A and B in Figure 2). The public policy and financing interfaces (C and D in Figure 2) were chosen due to their fundamental relevance (see above). However, the definition of company-environment relationships will always depend on particular research interests.

[-> An in-depth discussion of these aspects can be found in section 3 of the framework paper.]

4. Four arguments why “the flexible thing in the middle” is important, derived from the BMfSI framework

The discussion of these four interfaces in the framework paper lead to four corollaries about the role of business models for the success of sustainability innovations. These corollaries help to answer the question: Which role can business models play in overcoming barriers to profiting from sustainability innovation? Or: Why is “the flexible thing in the middle” important?

The short answer is that sustainable entrepreneurs can use their current, modified, or entirely new business models to:

  • Compensate for “built-in” competitive disadvantages of their innovations (e.g. relatively higher costs) through more competitive business model designs, i.e. shifting competition from products and services to the underlying business models;
  • Amplify their sustainability and innovation strategies and develop strategic business case drivers, such as lower costs, an outstanding reputation, increased innovativeness etc.;
  • Combine internally given resources and capabilities with externally available resources and capabilities, such as financial capital, know-how, or other complementary assets that are provided, inter alia, by favourable policy frameworks; and
  • Adapt to investors’ and customers’ preferences to develop new sources of financing and revenues, which requires experimentation with new investment, cash-flow, and/or revenue models combined with new customer and partner segments.

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[-> An in-depth discussion of these aspects can be found in sections 3 and 4 of the framework paper.]

Literature

Al-Debei, M. & Avison, D. (2010): Developing a unified framework of the business model concept, European Journal of Information Systems, Vol. 19, No. 3, 359–376.

Beltramello, A.; Haie-Fayle, L. & Pilat, D. (2013): Why New Business Models Matter for Green Growth. Paris: OECD Publishing.

Bisgaard, T.; Henriksen, K. & Bjerre, M. (2012): Green Business Model Innovation – Conceptualisation, Next Practice and Policy. Oslo: Nordic Innovation.

Boons, F. (2009): Creating ecological value. An evolutionary approach to business strategies and the natural environment. Cheltenham: Edward Elgar.

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

Cohen, B. & Winn, M. (2007): Market imperfections, opportunity and sustainable entrepreneurship, Journal of Business Venturing, Vol. 22, No. 1, 29–49.

Chesbrough, H. (2010): Business model innovation: opportunities and barriers, Long Range Planning, Vol. 43, No. 2/3, 354–363.

Chesbrough, H. & Rosenbloom, R. (2002): The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spin-off companies, Industrial & Corporate Change, Vol. 11, No. 3, 529–555.

Doganova, L. & Eyquem-Renault, M. (2009): What do business models do? Innovation devices in technology entrepreneurship, Research Policy, Vol. 38, No. 10, 1559–1570.

Hansen, E.; Große-Dunker, F. & Reichwald, R. (2009): Sustainability Innovation Cube – A Framework to Evaluate Sustainability-Oriented Innovations, International Journal of Innovation Management, Vol. 13, No. 4, 683–713.

Hansen, E. & Schaltegger, S. (2013, forthcoming): 100% organic? A sustainable entrepreneurship perspective on the diffusion of organic clothing, Corporate Governance: The International Journal of Business in Society.

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, 481–492.

Mallon, R. (2008): Naturalistic Approaches to Social Construction, in: Zalta, E. (Eds.): The Stanford Encyclopedia of Philosophy (Winter 2008 Edition). Stanford, CA: Stanford University, 1–21.

Osterwalder, A. (2004): The business model ontology: A proposition in a design science approach. PhD Thesis. Lausanne: Universite de Lausanne.

Sánchez, P. & Ricart, J. (2010): Business model innovation and sources of value creation in low-income markets, European Management Review, Vol. 7, No. 7, 138–154.

Schaltegger, S. & Wagner, M. (2011): Sustainable entrepreneurship and sustainability innovation: categories and interactions, Business Strategy and the Environment, Vol. 20, No. 4, 222–237.

Seelos, C. (2013, forthcoming): Theorizing and Strategizing with Models: Generative Models of Social Enterprises, International Journal of Entrepreneurial Venturing.

Seelos, C. & Mair, J. (2005): Social entrepreneurship: Creating new business models to serve the poor, Business Horizons, Vol. 48, No. 3, 241–246.

Teece, D. (1986): Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy, Research Policy, Vol. 15, No. 6, 285–305.

Teece, D. (2006): Reflections on “Profiting from Innovation”, Research Policy, Vol. 35, No. 8, 1131–1146.

2 comments

  1. Supot Chunhachoti-ananta · · Reply

    Dear Florian,

    I will have to carefully read this article. But I would like to ask for your (as well as all the experts who are reading this) ideas regarding the definitions and differences between
    – (general) business models for sustainable innovation (products and services that contribute to SD) and
    – sustainable business models (which are designed according to SD criteria and measured/assessed through them as well) for any (conventional) products and services.

    Cheers,
    Tei

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