The last post illustrated how sustainability can bring financial benefits to companies that adopt it as part their strategy. So, how do companies shape their strategy to become sustainable? According to a highly cited HBS working paper, strategy is essentially about choosing and executing the right business model. So, business models are key to a sustainability strategy.
This post looks at how to define sustainability-centered business models. Moreover, the post shows some examples of business model “patterns” centered around sustainability.
Sustainability-centered business models
In their “Business Model Generation” bestselling book, Osterwalder and Pygneur define a business model as “the rationale of how an organization creates, delivers and captures value“.
However, while traditional business models mostly focus on economic value, sustainability-centered business models add social and environmental dimensions to the equation. In this way, the traditional business model becomes a triple-layered business model. Each of the three layers focuses on delivering some kind of return: return on financial capital, return on natural capital, return on social capital.
So, let us first look at the three layers separately.
The economic layer
The economic layer focuses on the financial returns. It consists of the traditional business model that, according to Osterwalder and Pygneur, has 9 distinct building blocks. The building blocks cover 4 main areas.
- Customer value proposition: how the product generates value for the different customer segments
- Customer touchpoints: what key customer relationships and distribution channels exist between the value proposition and the customers
- Operations: what key activities, resources and partnerships characterize how the business is executed
- Financial model: how the company transforms costs into revenue streams and ultimately profits
The environmental Layer
The environmental layer adds the environmental value to the economic one . It also comprises 9 building blocks that cover 4 areas.
- Customer Environmental Value: how the uses and consumptions of the product or service impacts the environmental footprint of the value proposition
- Customer logistics: how the physical distribution, accessibility to the service and the product end-of-life impact the environmental footprint of the value proposition
- Supply chain: how internal production processes, resources employed and the supply chain impact the environmental footprint of the value proposition
- Ecologic model: how the business balances ecological costs with ecological benefits, in terms of CO2 emissions
The social layer
The social layer of the triple-layered business model aims at generating returns in terms of social capital. It also comprises 9 building blocks that cover 4 areas.
- Social Value: how the business generates value for society as a whole by recognizing diversity
- Societal interface: how to interface with society directly and by letting customers become promoters of social values
- Stakeholders engagement: How the business engages stakeholders and creates social value
- Social model: how the business balances different social impacts, including social costs, with social benefits
By addressing the triple-layered business model, companies can expand their existing business models towards sustainability, while startups can start drawing their sustainable business from scratches.
Business model patterns
How to start drawing a sustainable business model or readapting an existing one? The lengthy way consists of starting with a blank sheet and defining the business model in each and every detail. While this approach can generate an original business model, it can come with the cost be daunting and put the business at risk of adopting an unproven business model. Another, less risky, way is to revisit an existing business model and adapt it.
Some business models are similar to each other because they share some key features. Such similar business models constitute together a “pattern”. According to the database provided by the Business Model Innovation Lab, there are 55 business model patterns.
So, how can a business model pattern help with taking inspiration for a new business model? Rather than building an entire business model from scratches, a business model pattern provides with a generic, yet proven, business model structure that can be then tailored.
Example of a business model pattern
In the remaining part of the post, we will refer to business models that focus on sustainability. However, let us first look at an example of a business model pattern.
The example is the “long tail” business model pattern. The model consists of offering a high number of low-volume sales products rather than focusing exclusively on the high-volume sales products. Despite of the low unit margin, companies that successfully adopt this pattern generate high profits from selling low-margin products that other competitors cannot afford to sell. Companies like Lego, Netflix, Amazon and Google generate substantial revenue by using this pattern. Of course, the “long tail” pattern is not for every company. Indeed, it requires high levels of inventory and a quick order-to-delivery process that only companies with strong economies of scale can afford.
Business model patterns for sustainability
The “long tail” is a business model pattern that uses the economic business model layer. In this section, let us look at other business models patterns that address all the three layers of the sustainable business model.
1. Trash-to-Cash
The trash to cash is probably the most obvious environmentally sustainable business model pattern. It consists of converting of any product or resource at the end of its lifecycle into a new source of income. In the simplest version of this model, a company reuses or transforms potential waste into a different product. Reusing glass bottles has helped UK-based doorstep milk delivery company Milk & More to deal with recent low supply and high prices of glass bottles in Europe.
Another example is the “pfand” model, widespread in Germany and in many other Northern European countries. Thanks to this model, bottled drinks producers recover empty plastic and glass bottles from supermarkets. This allows to refill or recycle bottles thereafter. On the other hand, consumers have a financial incentive to return empty bottles to supermarkets. In fact, on the shelf price they pay a surcharge that gets them refunded when the bottle is returned.
The “trash-to-cash” pattern generates both ecological and economic value by reusing existing resources or products many times.
2. Refurbishing
Refurbishing, or reconditioning, is another way to generate cash from products at the end of their lifecycle. It consists of giving new life to a product at the end of its life. In particular, it entails substituting worn out components to bring the product back to a minimum quality. The refurbished product re-enters the market at a substantially lower price than the original one. This has two positive impacts to sustainability. First, and obviously, most of the product’s resources do not go to waste but find a new life. Second, by entering the market at a lower price, consumers who could not afford the original product can now purchase the product because of its lower price tag.
Counterintuitively, this business model generates value not only for consumers, but also for the companies that brought the original product to market. Take Apple for example. According to research by Black Market, a refurbished electronics marketplace, the majority of their sold products are Apple ones. More interestingly, the majority of these customers declare they would have never bought an Apple product if not heavily discounted. This is why, according to Apple CEO Tim Cook himself, having refurbished products on the market allows Apple to acquire new customers while preserving the brand’s image and premium pricing of its new products.
Finally, as long the price point for a refurbished product is right, the “refurbishing” business model does not cannibalize sales of new products. For a deeper insight into the “refurbishing” model, this white paper is quite informative.
The “refurbishing” model generates social value by making a product affordable for people who could previously not afford. At the same time, the model creates environmental value by reusing most of its components to regenerate a product.
3. Upcycling
While the “trash-to-cash” and the “refurbishing” models aim at keeping a product or a resource on the market for as long as possible, the “upcycling” business model pattern aims to transform a resource into a more valuable one. Specifically, “upcycling” transforms a non-recyclable waste material into a relatively high value material. For example, Pangaea sells high-quality handbags made out of old broken soccer balls. Moreover, Lebanase startup OrganyClean contributes to organic waste management by turning wasted fruits and vegetables into high-quality soap pads. This allows them to source a large share of the material they require for production for free and make a margin out of their new original creations.
The “upcycling” business model generates economic value for those companies that have the competences and the resources to virtually transform products from having value close to zero into demand-creating products. At the same value, the “upcycling” model generates social value because it allows highly skilled workers, and environmental value because of the reuse of resources.
4. As-a-service
The “as-a-service” business model pattern moves ownership from the end user to the producer. It is particularly suitable for products that require substantial post-sale service or maintenance. Disposal remains in control of the asset producer who can refurbish the asset. The producer rents out a machine or a service with a certain level of quality. The customer pays recurrently for the rent or the service as long as the agreed quality level is provided. When the machine or service become obsolete or does not provide the desired quality level, the producer retires the service. The producer can then repair and reintroduce to the same customer, refurbish and resell to a different customer segment, or dismiss the machine.
A suitable pricing strategy for the “as-a-service” business model is “pay-per-use”. In this case, customers pay only a small upfront fee to receive the machine, while they pay every time they use the machine.
5. Sharing Economy
The “sharing economy” is a business model pattern where multiple market players share the same resources, so that they do not have to acquire them by themselves. This brings an obvious reduction of costs for the players and a drastic reduction of resources. The concept has earned much traction in the last years thanks to the advent of online platforms, or aggregators, that facilitate different players to find each other and share goods or services.
In transportation, an example of sharing economy is shared mobility. According to this model, a service provider makes vehicles available to consumers for short periods in exchange of a rental fee. In this way, consumers can avoid purchasing vehicles and providers can keep vehicles continuously utilized. According to a recent survey on European car-sharing users, a Car-sharing vehicle can replace 20 personally owned vehicles. Although the advent of shared mobility might sound as a danger for automobiles sales, a report from McKinsey explains how shared mobility can provide new opportunities even for automakers, if they position themselves appropriately. For example, automakers can design and bring to market vehicles specifically designed for shared mobility or become fleet operators themselves.
6. Micro-crediting
Another sustainable business model pattern is “micro-crediting“. “Micro-crediting” offers financing to individual borrowers without asking for a collateral, as banks normally do. However, as each individual borrower would be too risky to lend to on their own, communities borrow as groups rather than individuals, so that members offer collateral for each other. Individual members pay their loan over time as they bring in new revenue and cover each other in case other members go bankrupt.
Micro-crediting increases social capital by creating jobs and wealth within local communities, and environmental capital by providing a community with the capital to renovate and upgrade their assets into more environmental friendly ones. Grameen bank, probably the most notorious example of this model, was established in Bangladesh in 1983 and started with crediting women to purchase raw materials to produce, and later commercialize, bamboo stools.
Barefoot Power, another company who relies on the micro-credit business model pattern, offers micro-credit to families that cannot afford buying solar-powered light. Thanks to micro-credit, local communities can have better quality of life and much lower upfront capital expenditures.
7. Carbon offsetting
For some companies, the biggest impact to the environment comes from activities and resources tightly related to their value proposition. Airline companies, for example, have little space to change their business model to reduce their environmental impact in a drastic way. Switching to biofuels is a way to reduce carbon footprint. The Scandinavian Braathens Regional Airlines, for example, uses biofuels to reduce by roughly 70% their carbon footprint.
An additional way for industries with high carbon footprint to become net zero is to offset their carbon emissions. This translates to ensuring that for every amount of carbon emission there is an equivalent amount captured or removed from the atmosphere through initiatives such as planting trees or investing in clean technology projects. Examples of offsetting schemes include funding reforestation or investing in renewable energy projects, like wind turbines or solar panels. Offsetting emissions does not only benefit companies, but also customers. However, when companies use carbon offsetting to avoid prioritizing in-house emissions reductions, the effect can be devastating because customer may be feel deceived and greenwashed.
Conclusion
Sustainability-centric business models allow to steer a business strategy towards social and environmental value. This post has described some examples of business model patterns that may serve as an inspiration to generate many other business models for sustainability. If you know other business models in this area, feel free to leave a comment.