How to Recognise a Sustainable Business Model
Every business has a business model which guides how it makes money, and how it creates, delivers and captures value for its shareholders.
What exactly is a business model?
The model defines what makes the business different from competitors; what activities the business engages in; who the business partners with to carry out these activities; what resources are needed; where money comes from; where costs comes from; what kinds of customers they target; how they reach these customers; and what kinds of relationships they have these these customers. This goes above just products and services, but how the business organises as a whole.
Deciding these is as complex as it sounds, especially as the manager has to look at so many factors - externally, what is happening in the world that could affect the business, what their competitors are doing; and internally, how the business does things and what kinds of strengths and weaknesses they have.
A company can actually have multiple business models and can change its business model over the years to best suit its purpose. For example, Rolls Royce has gone from simply selling their aero engines to also leasing and exchanging engines. Ericsson went from selling mobile phones to the general public to only providing telecommunications services to other businesses. Large retailers like Walmart are now acquiring capabilities for online purchases and delivery along with their large stores.
What’s the problem with current business models?
Here’s the thing though. The business models that we have known are built around the key expectations for business - profit and business growth to ensure continued profit. Shareholders will likely never believe that they are making enough money, so they will always want to see annual business growth.
But business growth the world over is being threatened by social and environmental global challenges, all of which create wicked problems because these challenges are so systemic. For example, natural resources are being extracted faster than they can be renewed; population growth and other changing demographics (e.g. ageing populations in Japan and Austria) spell marked changes in consumer preferences and increased use of nonrenewable resources; climate change and the resulting implications such as sea level rises and unpredictable weather; biodiversity extinctions; rising air, water and land pollution; water scarcity, etc.
In what new ways can we look at business models?
Business models are not new. But given these current challenges and better understanding of the natural boundaries we are now pushing, few current business models are actually resilient for the future. For sustained profit, business model innovation is needed. The concept of sustainability and its triple bottom line provides a good framework for this innovation.
Triple bottom line advocates a win-win-win situation, where profits are sought through activities that benefit, rather than harm, communities and environments.
But doing this is hard, especially in the short term. And balancing this with short term profit expectations and pressures is a daunting challenge. Managers are not being taught how to organise resources in order to achieve this balance. This organisation comes in the form of a business model which not only answers how the business will make money, create, deliver and capture value for its shareholders, but how it will also benefit rather than harm the society and environment as a whole.
What makes a business model sustainable?
A sustainable business model does not look at only one stakeholder - namely the shareholder, but instead, looks at all stakeholders holistically - from communities, biodiversity, employees, regulators, and other relevant organisations. It does this to explore how it can best organise for the benefit of all these stakeholders…to one degree or the other depending on the business’ purpose.
Essentially though, the business model has to ensure that profit is created, but that in doing this, also making sure that the business is resilient enough to withstand the large scale systemic challenges we are now experiencing. Furthermore, the model must take into consideration that the business cannot succeed in a failing economy; and so it has to factor in how it will contribute to ensuring a sustainable and thriving local and global economy (financially, socially and environmentally).
How would you recognise a business with a sustainable business model?
A business with a sustainable business model will explore at least one of the following innovations which are aimed at addressing some of the challenges discussed above. For example:
Reducing dependence on natural resources: The business aims to reduce its environmental impact by having a closed-loop production model whereby raw materials are continuously recycled back into the production system. Also, the business may reduce its brick and mortar infrastructure and products, and replace these with virtual infrastructure and products (e.g. replacing music CDs with MP3 downloadable music files). Upcycling old products into new or different products is also part of this.
Promoting responsible consumption: Whereby the business offers its products and services in a way that it directly influences customer behaviour towards responsible consumption - the sharing economy is a good example of this, with car rentals instead of purchases; sharing homes as promoted by AirBnB, ride sharing, etc. Also, leasing products instead of selling them outright is a model used to promote responsible consumption.
Acting as part of society: The business clearly sees itself as a part of the society it operates in, and contributes to the social progress of society’s members. For example, it allocates a portion of its profits towards providing a product/service (similar or complimentary to its core product/service) to a community/segment of people. It could also allow members to own shares in the business (whether employees or community members). Also, it could source its products from a deliberate target group (i.e. have an inclusive supply chain).
Understand its part in promoting a sustainable and thriving economy by ensuring equitable access to its products/services. For example, providing innovative financing or micro-financing options to purchase its products/services (e.g. offering a subscription package like several renewable energy providers are now exploring); designing its products to make it more affordable to the poor (e.g. the small beverage satchets/packages that are now common in Nigeria); and making deliberate effort to promote diversity and equality in the workplace.
What is the key challenges with business model innovation?
An eight-year study by MIT Sloan Management Review and The Boston Consulting Group revealed that 50% of the companies they surveyed have changed their business models because of sustainability opportunities. And 59% of those who have reaped benefits from these changes made drastic changes to their business models (they changed three or more elements). This hints that transformational changes to business models are more effective than incremental changes.
But it would be difficult to convince the business’ leadership to make such a transformational business model change unless the change is as a reaction to a significant threat or a clear opportunity. Such triggers usually come in the form of disruptions - e.g. new technology, new entrants into the market, changing customer preferences, new customer target segments, regulations, etc.
Such an innovation is a big step for any business and not lightly entered into. This is why it is important for business managers to constantly keep watch of the context within which they run their business in order to know when to take this step.
What other innovative business models can you think of? Please share in the comment box below.