Business model innovation … but a truly innovative sustainable business model is still elusive
May 8, 2015
The promise of business-model innovation has long captivated the sustainability field, generating plenty of hype. But all the talk has yet to yield many real business-model changes.
You might not know it to hear companies talk. Any business change can end up being classified as “business model innovation”. In a BCG and MIT survey of executives and managers earlier this year, nearly half of the respondents said their companies had changed their business models as a result of sustainability opportunities. However, the majority of innovations we see involve changes in companies’ processes and/or products, not underlying business models.
This raises the question: What exactly is a business model? The most succinct definition, based on a search across a range of consultancies and researchers, comes from the book Business Model Generation. It defines business models as the “fundamental structures for how companies create, deliver and capture value”. Often, it’s not the product or service alone that determines business success, but the entire value structure around the offering.
SustainAbility and GlobeScan’s report, Changing Tack, reveals an urgent need for fundamentally different approaches to creating, delivering and capturing value. Here are a few important reasons to focus on true business-model innovation.
1. Process and product innovation alone aren’t enough
Incremental process and product innovations have certainly brought us cleaner, more efficient, more socially conscious products and services but as the report points out, “for the most part they’ve failed to grow beyond a premium-priced or green-lifestyle niche”. The vast majority of consumers and companies remain unwilling to pay a premium for such advances. Alternatively, many novel or even radical new process or product innovations have fallen short of their potential because they were unable to compete within the constraints of an existing or traditional business model.
One useful illustration of the power of business-model innovation comes from LifeStraw, which has gained a growing foothold in the developing world. LifeStraw’s product – a personal-use straw designed to remove 99.9% of all waterborne bacteria and parasites – is certainly innovative. But the product is only successful if it reaches those who need it, particularly in countries with less access to clean water. The business model that’s driven the company’s success relies on a unique approach to distribution and financing. The company uses a carbon-offset system to earn families income, via carbon credits, for using the straw instead of cutting down trees for firewood to boil water.
Meanwhile, a Stanford University-based startup, re.source, produces low-cost portable toilets for urban slum residents who don’t have access to hygienic sanitation services. The business model that supports the product innovation includes offering an affordable monthly membership, providing waste-collection services and processing the waste into useful products such as organic fertilizers and energy.
2. New business models can transform industries
The biggest reason for companies to embrace business-model innovation is the threat that current models will ultimately slip or even fail. Examples of business models that have quickly transformed – or even become obsolete – abound across sectors: media (the decline of print), retail (the rise of online shopping and the sharing economy), education (the growth of online degree programs), music (the boom in digital music services such as Spotify and iTunes), telecommunications (the proliferation of smart devices and associated services) and even finance (the creation of peer-to-peer lending).
Many traditional business models that still remain viable today may rely on mispriced resources and other market distortions that make them more competitive than they would otherwise be. As sustainability trends and challenges – including energy and commodity price fluctuation, supply insecurity or demands for transparency – continue to shift the foundations of our current business models, incremental innovation will become less and less effective in enabling companies to adapt and succeed.
Rewards await those who can do it right. In health care, Narayana Hrudayalaya Hospitals, winner of a Financial Times’ Boldness in Business award in 2013, provides a good example. The hospital uses innovative process efficiency, revenue generation, cost structure and financing to make a profit while providing both rich and poor access to vital health care services. The company, along with others such as Aravind Eye Care, is changing the way medical providers in India think about the cost, quality and reach of their services. At Narayana Hrudayalaya, the average open-heart surgery costs less than $2,000, compared to well over $100,000 in the US.
3. Business-model innovation catalyzes broader systems change
According to a 2012 paper from MIT, it’s important to innovate in areas where the competition is unable or unwilling to act – and to involve an entire “activity system” in a way they might find it difficult to replicate. The classic example is the Apple iPod, which wouldn’t have been the game changer that it was without the iTunes ecosystem. That combination dramatically changed how we acquire, store and listen to music.
To innovate within systems, companies need to be able to see and adapt to shifting market conditions and other changes by identifying trends and engaging stakeholders. Leaders must respond to, but also create, systemic change to build new markets while protecting themselves from any dramatic systems shifts that could present a risk. To do all this, companies must be willing to see beyond the obvious, short-term business case.
The demise of Better Place earlier this year provides a cautionary tale that illustrates the need for larger systems change. The electric car venture, based on an innovative battery-swapping technology, sold only 750 cars, while amassing losses of more than $500m. Ultimately, the success of Better Place depended on broader systems changes that never materialized, including tax and/or subsidy support, local government approval in building battery-switching stations and automaker design partnerships.
None of this is to say that process and product innovation aren’t needed. But it isn’t enough for companies to fully capitalize on the much-hyped promise of “sustainable innovation”. Along with product and process innovation, we urgently need to make fundamental changes to business models – and the systems that support them – to meet our current and future sustainability challenges. Companies have the opportunity to use their unique foresight and influence to improve their own competitive positions and lead the way to better business models for others.
This article first appeared in The Guardian