Papers in Brief (XVIII): Täuscher & Abdelkafi (2018): Scalability and Robustness of Business Models for Sustainability: A Simulation Experiment

[Note: This is the 18th 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 (XVIII) by Karl Täuscher

Täuscher, K. & Abdelkafi, N. (2018): Scalability and robustness of business models for sustainability: A simulation experiment, Journal of Cleaner Production, Vol. 170, pp. 654-664, https://doi.org/10.1016/j.jclepro.2017.09.023.

Research background and relevance

Entrepreneurial ventures increasingly aim at developing viable business models for solving societal or ecological challenges. To deliver substantial impact on society, these business models should be scalable and robust to changes in their environment. Among others, a highly scalable business model allows firms to neutralize high initial costs of market and infrastructure development and to offer goods and services at low-profit margins. Previous research on business models for sustainability (BMfS) has shown that business models become scalable if they build on reinforcing mechanisms of value creation and capture. While it is compelling to focus mostly on the scalability and potential for sustainability impact, mainstream business model research (Casadesus-Masanell & Ricart, 2011) makes the case that business models are effective if they are robust, i.e. can deal with changes in their environment and fend off competitors. Even a highly scalable BMfS will not contribute any value to society if the firm cannot survive a competitive attack or a change in its environment. The failure of Better Place, an entrepreneurial venture with an innovative business model for electric mobility, provides a good case in point. To date, however, there is a lack of understanding about how to test and evaluate these criteria.

A better understanding about the successful design of entrepreneurial BMfS matters. Entrepreneurship is considered as a potential panacea for a variety of today’s most pressing social challenges (Hall, Daneke, & Lenox, 2010). Sustainable entrepreneurs are, however, confronted with complex decisions as they need to account for hybrid strategic objectives: financial performance and their impact on social, economic, or ecological sustainability. Hence, supporting entrepreneurs in their business model decisions can enable them to tackle sustainability challenges more effectively. The paper thus aims to contribute to a better understanding of scalability and robustness of BMfS.

Research approach and context

Towards this aim, the paper develops the first mathematical model of BMfS. Ever since the Club of Rome’s The Limits to Growth report in 1972, System Dynamics simulation modeling has provided sustainability scholars with a formal method to support sustainability-related decisions. The presented simulation model extends and operationalizes the theoretical model of BMfS by Abdelkafi and Täuscher (2016; see Papers in Brief X). It represents the four dimensions of BMfS and their causal dependencies, through a formal equation system. The modelling approach allows formalizing different feedback loops between different business model elements.

PiB_xviii_1

Figure 1. Reinforcing feedback loops generated by Coursera’s business model.

The research focuses on the context of Massive Open Online Course (MOOC) providers. MOOC providers are mostly platform-based ventures that aim to provide free and global access to high-class education. The simulation model is adapted to represent the business model of Coursera, a pioneering MOOC provider that – at the time – delivered online lectures from leading Universities to more than ten million learners worldwide. At its core, the business model engenders two types of feedback loops. The figure shows that both feedback loops reinforce the number of users in every period. On the one hand, Coursera’s sustainability orientation allows the venture to generate viral effects between users and non-users (left side). On the other hand, the business model allows Coursera to capture financial value by applying a Freemium revenue model. In a Freemium model, the firm offers a basic product version for free but charges for complementary services. Coursera’s users become paying customers if they buy an official certification for completing a course, among others. Coursera can invest these revenues to acquire new partner universities that will further increase the number of courses offered on the platform. A broader selection of courses – and partner universities – consequently incentivizes potential users to enroll in a course as well as existing users to continue using the platform. Coursera can serve additional users at marginal costs as it has developed a scalable digital platform and partnering universities bear most of the costs related to the delivery of courses. Thus, the scalable business model likely allows Coursera to continuously increase its societal value and financial performance as it grows its user network.

Research results

The simulation of Coursera’s business model confirms the scalability hypothesis. In fact, the simulation shows how Coursera’s societal value and financial performance grows at an almost exponential rate during the final simulation periods. However, the firm operates in a rapidly changing market environment, whose dynamics cannot be reliably anticipated. The paper thus develops alternative future scenarios and transforms them into alternative configurations of some of the model’s parameters. Simulating these alternative model configurations allows assessing the robustness of the business model under alternative scenarios.

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Figure 2. Simulated growth trajectory for Coursera’s base case assumptions.

These simulation experiments show that the business model partially lacks robustness. As expected, sustainability and financial performance (presented above) is lower in each of the scenarios compared to the previously presented base case simulation (red line). The business model can seemingly deal with a stagnating growth of the MOOC market (low market adoption scenario) and a scenario in which Coursera’s operating efficiency declines and different costs increase substantially (low operational efficiency scenario). However, it produces growing losses in a scenario in which the firm’s competitors apply aggressive growth strategies (high competition). In the scenario, Coursera continues to increase its societal value but fails to convert free users into paying customers. The simulation results in the scenarios are in line with performance dynamic typically observed in platform markets: platforms either proliferate, develop a dominant market position, and capture increasing value, or they increasingly lose market share against the dominant platform. In the latter case, the growing losses would eventually force the firm to exit the market, focus on a market niche, or innovate its business model. These results show that the business model is highly scalable but partly lacks robustness.

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Figure 3. Simulation results for financial performance in the base case and alternative scenarios.

Conclusion

The simulation findings confirm the conceptual proposition that effective business model design can overcome the trade-off between financial performance and sustainability over an extended period (Abdelkafi & Täuscher, 2016; Schaltegger, Hansen, & Lüdeke-Freund, 2016). Under supportive conditions, Coursera simultaneously increases its financial and sustainability performance. At the same time, the findings emphasize the need for a more nuanced perspective on effective BMfS. Given the turbulence and uncertainties associated with newly emerging market categories – such as the MOOC market – sustainable entrepreneurs will increase their success chances if they are developing business models that are not only scalable but also robust. Designing successful BMfS, therefore, requires entrepreneurs to create a virtuous circle of ‘doing good’ and ‘doing well’, while balancing the business model’s scalability and robustness.

References

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

Casadesus-Masanell, R. and Ricart, J.E. (2011). How to design a winning business model, Harvard Business Review, 89(1/2): 100–107.

Hall, J.K., Daneke, G.A. and Lenox, M.J. (2010). Sustainable development and entrepreneurship: Past contributions and future directions, Journal of Business Venturing, 25(5): 439–448.

Schaltegger, S., Hansen, E.G. and Lüdeke-Freund, F. (2016). Business Models for Sustainability: Origins, Present Research, and Future Avenues, Organization & Environment, 29(1): 3–10.

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