BUS446 Flashcards
Sustainable business model
Def
Organizational designes for value creation, value delivery, and value capture, where the company’s reduction of negative externalities or reinforcement of the company’s positive externalities, or both, are integral part of the way value is created, delivered, and captured.
Responsible vs profitable
Responsibility has traditionally been seen as a cost at the expense of a company’s profitability - at least short term. The relationship between the two has thus been conceptualized as a trade-off.
A more modern view gained in recent years is that business models can be designed to create win-win situastions, where responsibility can lead to more profitability.
Business model
Explain
The business model is the rational of how an organization creates, captures and delivers value (Osterwalder & Pigneur 2010). This means that a busniess model describes how a company works, what it does, and how it makes money. By looking at the aforementioned definition, the business model exists of the following three components: value creation, value delivery and value capture.
The value creation refers to the value proposition the company delivers to its customers. What are the job to be done? Furthermore, the company must deliver this value proposition in some way. This is done through key resources, activities and partnerships. Lastly, the company needs to capture the value with some sort of profit formula. This could be a revenue stream or a specific cost structure. The important thing is that all the components are interrelated, and are all rising from values from business opportunities. This can be showed in the following figure
Externalities
A company performs activities, and based on these activities the company will have an enviromental and social impact. This is often referred to as externalities, which are the negative and/or positive side-effects of a company’s operation on the enviroment and society.
The positive externalities, or the sunny side, can be tax to the community. The negative externalities, or the shadow side, can be pollution to the groundwater near the factory. The aim for any given company should therefore be to shed more light and cast less shadow, or in other words, “be more good and less bad”. This can be illustrated through the following figure
Stakeholder def
Inidviduals or groups that are affected by the company’s activities.
Responsibility cube
Third dimsension is wether the company is a harvester, or non-harvester (economoic gain or not).
Companies can use the responsibility cube to analyze the possibilites they have for taking their corporate responsibility in a direction that enables them to attain the results they wish.
(Genuine and strategic have a greater chance of remaining harvester, and if non-harvester are better suited to more easily become harvester.)
3-steps to implementation
Reformulation of strategy
Reorientation of values
Reorgansing
Reformulation of strategy
Jørgensen & Pedersen apporach strategy as one of problem-formulation and problem-solving. We have to ask; what is the problem?
So this view that they argue for is called strategic reformulation, which involves approaching strategy as a process of finding, reformulating and solving problems. In general terms this problem can be defined as the gap between the current and desired state.
One framwork that can be used to make this easier is for example strategy pictures, of current and desired state. The gap is the problem, the strategy is how to close the gap.
Reorientation of values
Difficult, but very important. As the saying goes “culture eats strategy for breakfast”. It is therefore argued that introducing a sustainable business model will require a value reorientation, and this reorientation cannot just be managed, it must also be led.
This means that managers must mark out the new course and make the goal or goals meaningful to employees and other stakeholder. This my be done by involving both internal and external stakeholders in order to make them feel ownership of the organization’s purpose, and thereby support the business strategy.
Reorganising
If one reformulates a company’s strategy and reoirentates its values, this should naturally lead to a reorganization of the company’s design. The following four dimensions framework from Jørgensen & Pederesen is baded on the recognition that making the company responsible involves an expansion of the understanding of performance. From the one-sided understanding of performance being synonymous with profitability, to also add social and enviromental performance.
Organizational structure - Decision rights and role titles (not become a side car, maybe a role of a high up sustainanble exec etc.)
Boundary spanners - Link between company and surroundings (hiring one working with these issues to have a dialogue and close knowledge gap etc)
Measurement and control - Need to design correct KPIs, so performance can be measured on social and enviromental performance as well.
Incentive - Need to redesign incentive system to promote the new performance factors as well. Not just in economic terms, but also regarding norm, culture and morality.
Three major trends that indicate need for changes in current business models
- We are facing a massive sustainability problem
- The tecnological revolution, which has a double effect: It renders old business models obsolete, and it creates huge possibilites for creating value in new ways.
- Changing consumer preferences and consumption patterns help make new types of value creation possible (ex. sharing-economic, acced-based services and so on)
RESTART
When making a case for RESTART it is in reference to three major trends that indicate need for change. RESTART is a seven step framework to a sustainable business model.
REDESIGN rather than standstill
EXPERIMENTATION rather than turnaround
SERVICE-LOGIC rather than product-logic
THE CIRCULAR rather than the linear economy
ALLIANCES rather than solo-runs
RESULTS rather than indulgences
THREE-DIMENSIONALITY rather than one-dimensionality
Redesign of business models reflects new ways to create, deliver and capture value, by taking into consideration sustainability issues and technological capabilities as drivers for business model innovation.
In order to successfully redesign it is neccessary to conduct controlles experiments to identify and analyze what works and what does not. Rather than all eggs in one basket, one should experiment.
Often sustainability can be promoted by service-logic. Value creation and deliviery is here oriented towards granting acces, not ownership.
Every company in the world use energy, water and other resources. To become more sustainable in a way that is compatible with financial performance it can be helpful to think in terms of circular economy when designing how resources are acquired, processen, used and ultimately reused.
Solutions that promote circulation and service thinking will often require that we enter into allianes with other organizations. To exploit complimentary factors.
In order to set the correct goals and prioritize efforts that can promote sustainability and profitability, it is important to emphasize the right results. This involves identifying key externalities and material sustainability concerns that are ciritical for corporate strategy and operation.
To succeed in achieving these foals, the entire organization must be designed in a way that reflects three-dimensionality. (Reflecting social, enviromental and economic objectives).
Short version:
This will require a redesign of business models, in which companies will have to experiment towards finding new well-functioning ways of doing business. For better utilization of resources using a service-logic in business models inspired by the circular economy will thus be appropriate. To achieve this in practice, alliances will be necessary, and for succeeding with a transition towards more sustainable business models, companies must prioritize the right results and design a three-dimensional performance measurement and management system to support the work.
Approaches to sustainability
aka. two faces of sustainability
The ongoing discussion on sustainable business can roughly be divided in two. On the one hand, there is the question of what responsibilities companies have for solving the problems they create. This relates to reducing the company’s negative impact on society and the environment – what is often called negative externalities. On the other hand, there is the question of which opportunities companies have related to reducing the negative externalities of others, by finding profitable ways to solve the problems that others have created (Jørgensen and Pedersen, 2017).
In both ways, companies can shape sustainable business models that integrate social and environmental goals achievement in such a way that the companies are profiled as both responsible and profitable. This positive connection exist between sustainability performance and financial performance, through enabling sustainable companies to take advantage of business opportunities to which they otherwise would not have had access, or for which they would otherwise be less competetive.
Alligning profitability and sustainability
All companies have shadow sides that they can take steps to reduce and all companies can shed more light. In order for this to be profitable, however, it must be integrated into the company’s business model in such a way that sustainability efforts make the business model work better (Jorgensen and Pedersen, 2017). This means that the efforts must help the company reach more clients or customers who have a higher willingness to pay, contribute to more cost-effective delivery, or in other ways increase the revenue or reduce the costs of the company. There are a number of recent studies that show that such effects are possible to achieve, but they require appropriate prioritization of the sustainability issues that are most important to stakeholders and most critical to the company (see, e. Khan et al., 2016; Eccles et al., 2014). It thus means that companies that want to succeed in aligning sustainability and profitability must work systematically and strategically.
Detail on studies
Kiron et al. (2012)
- Most firms see sustainability as necessary to compete
- So called “embracers” (24%) are much more likely to be harvester
Eccles et al. (2014)
- High sustainability firms outperform low sustainability firms, both on stock market performance and accounting-based performance.
- This holds when controlling for alternative explanations, including omitted risk, sustainability as luxury good and several others
Khan et al. (2015)
Materiality matters! Those with high performance on matieral factors outperform those with low. Those with high performance on immaterial factors do not outperform those with low.
Materiality analyses
To achieve this, it is necessary to focus on results rather than indulgences. This implies emphasizing the material sustainability issues pertaining to the business model, or to help solve other companies’ material issues. This is a question of prioritization, since all companies cannot solve all the problems they face.
Such materiality analyses involve assessing wether the sustainability issues are more or less material for the company itself and for its stakeholders. As shown in the figure, it makes sense to prioritize the sustainability issues that lie in the upper right corner, which are important both for the company and its stakeholders. From the point of view of the company, the challenge is to monitor the sustainability issues that are moving in that direction – an analysis like this will of course be anything but static. The palm oil problem faced by Freia and other companies is a good illustration of this. In a relatively short time prior to the palm oil issue becoming a big story in the media, a materiality analysis of the industry would not place palm oil in the upper right corner, but the problem quickly moved there when the public conversation centered on palm oil. Therefore, the question “what is the next palm oil?” is quite right to ask for from a management perspective in this industry, since it is a question of monitoring the sustainability issues that may become material and therefore important for the company’s performance.
(with the axes “important to stakeholders”, i.e. likely to influence stakeholder assessments and decisions, and “important to the firm”, i.e. the significance of economic, environmental and social impacts)
Another relevant discussion here relates to issues where the company and stakeholders disagree on whether or not the issue is in fact detrimental to society and the environment. We have spent some time discussing this in the classroom, with particular reference to sustainability issues that are salient to stakeholders even though they may not, “objectively” speaking, be important from a sustainability point of view. One case we have used as an example are fish farming companies’ inability to persuade its customers that antibiotics are a problem in farmed fish, which means that stakeholders still consider it a significant issue, while the company does not. We also discussed how palm oil in the food industry moved from being immaterial to highly material almost overnight, and how this illustrates the potential knowledge gap that both companies and stakeholders might have: Are we sure that we really know which sustainability issues we should be most concerned with?
Framework to move from linear to circular business models
