Papers in Brief (X): Abdelkafi & Täuscher (2016): Business Models For Sustainability from a System Dynamics Perspective

[Note: This is the tenth post in our “Papers in Brief” series. This series offers a special service as it explains the core ideas of chosen research papers in a nutshell.]

Papers in Brief (X) by Karl Täuscher

Abdelkafi, N. & Täuscher, K. (2016): Business Models for Sustainability From a System Dynamics Perspective, Organization & Environment, 29(1), 2016, pp. 74–96, doi: 10.1177/1086026615592930.

A variety of organizations aims at creating value to society and the environment, while achieving a sustainable financial performance. Such organizations aim at developing so-called business models for sustainability (BMfS). A BMfS depicts an organization’s logic of how it builds and uses specific resources to generate value to its customers and to the environment and/or society and to capture value for the organization itself. The BMfS’s impact on ecological and social sustainability can reach far beyond that of sustainable products or services (Schaltegger, Hansen, & Lüdeke-Freund, 2016). Yet, we do not know much about the design principles and inner functioning of these business models. As a consequence, our research aims to conceptualize the design of BMfS and depict the core design characteristics that allow these organizations to sustainably create value to their customers and the society at large, while capturing sufficient financial value.

Understanding the functioning of a BMfS is challenging since it requires considering various stakeholders at different system levels. Consider how a business model of a provider of electric mobility needs to incorporate activities of a diverse set of private and public actors such as car manufacturers, city planners, electricity providers, and car owners. Hence, understanding BMfS requires a theoretical perspective that can incorporate the relevant elements of different dimensions into a simple model and depict how they mutually interdepend on each other. To do so, the paper applies the perspective and tools of System Dynamics, a modelling paradigm used to represent complex systems and study their behavior. System Dynamics simulation models had gained high popularity through the Club of Rome’s famous report The Limits to Growth in 1972. Their simulations had demonstrated the efficiency of System Dynamics in understanding and predicting the basic behavior of a complex system, even under uncertain environmental conditions. Applying the perspective to the concept of BMfS, the aims to answer the questions: How can we effectively represent the key aspects of BMfS and its dynamics with System Dynamics?

One key characteristic of complex systems is that they produce feedback loops that either reinforce or balance the entire system. A reinforcing feedback loop acts as a virtuous cycle or vicious circle. The more people are born, the more people will be born in the next generation – an exponential growth curve is the consequence. In contrast, a balancing feedback loop keeps a system in balance. The more people are born, the more people will die – limiting the population growth. No matter the type of dynamic system, recognizing such feedback loops allows understanding the basic behavior of the system. Therefore, our research was further concerned with identifying the main feedback loops in the system structure of BMfS.

Business model literature generally distinguishes between three key value dimensions. The first dimension refers to the customer dimension: what value proposition do we offer to our customers? The second dimension refers to the value creation dimension: which resources and activities do we use to create this value proposition? The value capture dimension focuses on how the organization transforms the created value into revenues and profits. Considering these three dimensions from a System Dynamics perspective reveals that there consequences are closely interdependent. The more value creation capacity a company builds, the more value it can create to customers with all other things being equal. The more value a firm creates to customers, the more value it can capture. And the more value it can capture, the more value it can reinvest into its value creation capacity.

So, how do BMfS differ from general business models? BMfS integrate an additional dimension into their core logic that represents the natural environment (or the society). Previous literature had conceptualized the main element of this dimension as an environmental value proposition (Stubbs & Cocklin, 2008). Based on a comprehensive review of the related literature, we systematically model the relationships between the environmental value proposition and the identified elements in the other three dimensions. To do so, the paper builds on the business case drivers of sustainability identified by Schaltegger, Lüdeke-Freund and Hansen (Schaltegger, Lüdeke-Freund, & Hansen, 2012). These effects allowed identifying a multitude of causal connections between the four stocks.

 

system_dynamics_bmfs

Figure 1. Causal relationships between key stocks of business models for sustainability

The full representation shows that there are several possibilities to create a reinforcing loop between these four dimensions. This insight allows defining the core characteristic of an effective BMfS:

“A BMfS enables the firm to reinforce the mutual interdependencies between the value created for its customers and the natural environment as well as the value captured for itself.” (p. 78)

A business model becomes a BMfS if its design creates value to the environment that simultaneously strengthens the value to customers and/or the firm itself. This definition leads to the requirement that the firm’s value proposition to the environment needs to create some kind of sustained benefits to the firm’s customers and/or the firm itself. This can include an increased attractiveness as an employer or reduced operational risks. Besides, the business model needs to allow the firm to sustainably reinvest the captured value to scale its value creation capacity over time.

The main contribution of our research is a systemic understanding of the nature of BMfS. This understanding is embodied in both the developed models of BMfS and the integrative model that depicts the interdependencies between BMfS and their stakeholders. On the one hand, the systemic perspective provides a theoretical explanation for why and under which conditions it can be advantageous to deliver an environmental value proposition as an essential part of one’s business model. On the other hand, the developed models and the application case can support managers in designing effective BMfS. The research proposes a series of future research questions that can advance a holistic understanding of BMfS and their performance implications. Finally, it contributes to the business model and sustainability literature by enabling and sparking simulation-based research as a novel methodological approach.

References

Schaltegger, S.; Hansen, E. & Lüdeke-Freund, F. (2016): Business Models for Sustainability: Origins, Present Research, and Future Avenues, Organization & Environment, Vol. 29, No. 1, pp. 3–10, http://dx.doi.org/10.1177/1086026615599806.

Schaltegger, S.; Lüdeke-Freund, F. & Hansen, E. (2012): Business cases for sustainability: The role of business model innovation for corporate sustainability, International journal of innovation and sustainable development, Vol. 6, No. 2, pp. 95–119, http://dx.doi.org/10.1504/IJISD.2012.046944.

Stubbs, W. & Cocklin, C. (2008): Conceptualizing a “sustainability business model”, Organization and Environment, Vol. 21, No. 2, pp. 103–127, http://dx.doi.org/10.1177/1086026608318042.

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