Business Models for Resource Efficiency - Florian Lüdeke-Freund - Danish Technological Institute 2015

Dr. Florian Lüdeke-Freund University of Hamburg | Faculty of Business, Economics & Social Sciences Chair of Capital Markets and Management www.SustainableBusinessModel.org

Business Models for Resource Efficiency Danish Technological Institute Copenhagen, 23 November 2015

http://www.wiso.uni-hamburg.de/

A simple form of eco-efficient design (?) *

* Given that computer screens save energy with black instead of white presentations.

www.SustainableBusinessModel.org 3

Eco-efficient design meets business model imitation? Does it work?



Schmidt-Bleek, 2000

The resource efficiency question How to create useful artefacts that generate as much utility and joy as possible, using the smallest possible amount of natural resources, including footprints, for the longest possible period of time?



Boons & Lüdeke-Freund, 2013

The business model question How to bring resource-efficient innovations to the market in order to unfold their full potential, in ways that allow users to easily adopt them and companies to make a business?



Chesbrough, 2010; Hugo Spowers, 2014 (Founder and Chief Engineer of Riversimple, source: www.bbc.com)

Moving to the business model level “A mediocre technology pursued within a great business model may be more valuable than a great technology exploited via a mediocre business model.” “Disruptive technology can only work if it comes with a new business model.”



Business Model Basics



A business model describes how an organisation creates, delivers and captures value based on a particular value proposition.

Business Model

Casadesus-Masanell & Ricart, 2010; Johnson, 2010; Osterwalder & Pigneur, 2009



A business model describes how an organisation creates, delivers and captures value based on a particular value proposition.

Business Model



Business Model Example

http://www.digitalbusinessmodelguru.com

• “Earth's biggest selection” of products at lowest price

• “Earth's biggest platform” for other retailers and sellers

• …

• Large volume sales of hit items + selling less of more

• Profit sharing with other retailers and sellers

• Low overhead costs • …

• Amazon websites and app • Seller marketplace • Kindle ecosystem • Shipping by Amazon, other

retailers, sellers • …

“Long tail retailer”



Changes to the way an organisation creates, delivers and captures value based on a particular value proposition.

Business Model Innovation

“Tools on demand”

Sales of tools and accessories → Leasing a fleet of tools

Low margins, high inventory turnover → Higher margins, asset heavy, monthly payments

Distribution channels, low cost manufacturing → Direct sales, contract, inventory and repair management, warehousing

Johnson, 2010



“When significant changes are needed to all … elements of your existing model.” Opportunity to address the needs of excluded social groups

through disruptive innovation (e.g. Tata Nano).

Opportunity to capitalise on new technologies, or bring tested technologies to new markets (e.g. 3D printing).

Opportunity to capitalise on unmet customer needs in terms of price and/or quality (e.g. FedEx fast delivery).

Need to defend markets against disrupters (e.g. BMW vs. Tesla).

Need to respond to shifts in competition (e.g. high-end service vs. low-cost production).

When Do Companies Engage in Business Model Innovation?

Johnson et al., 2008



Four major categories of drivers for GBMI can be identified 1. Entrepreneurial values – normative orientations such as “doing good”

2. Consumer awareness – expectation of responsible business, green products, increasing willingness to pay

3. Gain / maintain competitive advantage – differentiate products & services, develop unique market position, deal with changing market conditions

4. Costs of resources and supply risks – search for alternative inputs, reduce amount of resources used, source from waste and by-products

5. Regulation – industry-specific laws and regulations force companies to adopt new business practices

Why Do Companies Engage in Green Business Model Innovation?

Bisgaard et al., 2012



Social business model innovation for the poor: Aravind Eye Care Systems

Business Model Innovation with a Purpose

http://www.aravind.org



Business model innovation for the environment: SunEdison’s PPA model

Business Model Innovation with a Purpose

http://de.slideshare.net/Alex.Osterwalder/a-business-model-for-solar-energy-sunedison-3319168



St. Gallen “Business Model Navigator” 55 patterns derived from business history, e.g.

- Auction - Cross Selling - Crowdfunding - Digitalisation - E-Commerce - Flatrate - Franchising - Freemium - No Frills - Peer-to-Peer - …

Business Model Innovation Patterns



Orientations for Sustainable Business Model Innovation (Examples)

Develop scale-up solutions - Sustainable solutions at a large scale to maximise benefits for society

- Effects: large-scale replacement of unsustainable solutions

Deliver functionality rather than ownership - Satisfying user needs without having to own physical products

- Effects: decoupling of profits and production volume

Maximise material and energy efficiency - Do more with fewer resources, generating less waste, emissions and pollution

- Effects: reduction of waste, emissions, over-capacities

Bocken et al., 2014



Business Cases for Sustainability with Business Model Innovation

Schaltegger & Burritt, 2005; Lüdeke-Freund, 2013

Economic performance

Social and/or ecological performance

Extended business case potential through sustainable business model innovation

ES*

ES0

ESP* ESP1

A

B

C F

E

D

ESP0



Economic performance

Weak BCfS

Weak BCfS

Strong BCfS

Business Cases for Sustainability with Business Model Innovation

Schaltegger & Burritt, 2005; Lüdeke-Freund, 2013

Social and/or ecological performance

Extended business case potential through sustainable business model innovation



Environmental and social externalities Capital intensity and long lead time The power of incumbents

Major Barriers to Green Business Model Innovation (General)

Wüstenhagen & Boehnke, 2008

Environmental and social externalities

Capital intensity and long lead time

The power of incumbents

Value proposition

Value delivery

Value capture

E.g. emphasis on private customer benefits

E.g. partnerships, value networks,

outsourcing

E.g. leasing, contracting, after-sales

services



Major Barriers to Green Business Model Innovation (Examples)

• Customers lack knowledge about green issues

• Traditional buying habits and price constraints

• Marketing not able to promote green products/services

• New materials and machinery too expensive

• New infrastructures and partnerships costly to establish

• Employees lack knowledge about alternative materials etc.

• Suppliers do not understand the new model

• Marketing not able to promote green products/services

Bisgaard et al., 2012



Emerging Sustainable Business Model Innovation Tools (Examples)

“Triple-Layered Business Model Canvas”

“Flourishing Business Canvas”

“Business Innovation Kit” & “Sustainability Innovation Pack”

Breuer & Lüdeke-Freund, 2015; Joyce et al., 2015; Upward & Jones, 2015



Business Models for Resource Efficiency



Incentive Models*

(1) Functional Sales (2) Energy Service Company (3) Chemical Management Service (4) Design, Build, Finance, Operate

*Bisgaard et al., 2012, Green Business Model Innovation



Customers pay for the result or functionality of a product, and not for the product itself → broad range of P-S combinations possible

Provider is incentivised to optimize life cycle cost efficiency, which can translate into lower life cycle environmental impacts

Functional Sales (a.k.a. Product Service System – PSS)

Example: Philips’ “Pay-per-Lux” model • Philips recycles existing equipment,

installs efficient lighting, • Equipment ownership is with Philips • Customer pays service fee for the light • Philips pays customer energy bills and

recycling costs at the end of equipment life Source: http://zwcblog.org/2014/08/08/selling-light-not-light-bulbs/



Range of Product Service Systems (PSS)

Tukker, 2004



Provider optimises and invests in customers’ energy systems, and earns a share of saved costs

Customers pay according to energy consumption and are compensated if savings are less than guaranteed

MASCO = material savings / WASCO = water savings

Energy Service Company (ESCo)

Example: Danfoss Power Solutions • Helps companies in the food and beverage

industry reduce their energy use • Guarantees their customers energy savings with

amortisation within 2-4 years • Is paid a percentage of the savings Source: http://powersolutions.danfoss.com



Provider is responsible for managing chemicals to fulfill particular task, e.g. cleaning a metal surface

Provider and customer have the common goal of reducing chemical costs Provider’s profit depends on how well/efficient the function is delivered,

instead of how much chemicals are sold

Chemical Management Services

Example: SAFECHEM • Provides customers with a complete

solvent cleaning solution • Does not sell quantities chemical

cleaning products • Closed-loop system: solvents are

delivered, used, taken back. Source: http://www.dow.com/safechem/eu/deu/de/solutions/



Providers undertake large construction projects, bundling financing, construction and maintenance in one long-term contract

Long-term contracts incentivise high quality in the construction project, so that life-cycle costs are lowered

Design, Build, Finance, Operate

Example: ALLFARVEG • Established for the new road between Lyngdal and

Flekkefjord in Norway • 25-year contract with the Norwegian Public Roads

Administration • Receives payment based on the performance of the road • E.g. use of brighter asphalt, requiring less energy to

light up the road – 30% reduction in electricity costs Source: http://www.allfarveg.no



Life Cycle Models*

(5) Green Supply Chain Management (6) Take Back Management (7) Cradle-to-cradle (8) Industrial symbiosis

*Bisgaard et al., 2012, Green Business Model Innovation



Raw materials are sourced as sustainably as possible, while toxic content is minimized and eliminated where possible

Suppliers are pressured to provide products and services that meet sustainability requirements

Includes variety of green “3R” strategies (reduce, reuse, recycle) and codes of conduct for responsible sourcing

Green Supply Chain Management

Example: IKEA IWAY • Code of conduct for purchasing products, materials

and services, introduced in 2000 • Systemises/formalises social and environmental

standards for suppliers within the supply chain • Addresses e.g. child labour, minimal wages,

reduction of air, water and soil pollution http://www.ikea.com/ms/en_GB/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf



Producers accept extended product responsibility and recover used products, surplus materials and waste from distributors and customers

Together with product designers, supply chain managers establish systems to recover this “feedstock” and reduce production costs

Crucial is to encourage distributors, customers and end users to engage in take back systems

Take Back Management

Example: Desso’s Take Back Programme • Offers taking back customers’ used carpets, both their own

brand and those of competitors • Desso recycles and recovers raw materials from used carpets • A broad range of carpet tiles contain 100%-recycled yarn • Market share and profitability have increased http://www.desso.fr/globalaccounts/regus/take-back%E2%84%A2-programme/



Goal is to establish circular flows of technical and biological nutrients “Waste” no longer exists, only inputs to the technical- or biological sphere Currently C2C is more about product (re-)design – radical business model

innovations supporting C2C are rare C2C certification available from Cradle to Cradle Products Innovation Institute

Cradle to Cradle (C2C)

Example: Gabriel • The Danish company manufactures cradle-to-cradle

certified wool, called Gaja • No harmful dyes, completely compostable • Once decomposed in nature, the wool becomes part of a

biological cycle – as a nutrient http://www.gabriel.dk/en/fabrics/textile/Gaja-C2C/30862



Identifies business opportunities that leverage underutilized resources Aims to reduce costs and environmental impact of participating organisations Traditionally separated industries engage in exchanges through shared

facilities and material flows The by-products and residuals of one participant become the input of another

Industrial Symbiosis

Example: Industrial symbiosis of Kalundborg • The first of its kind, consisting of seven companies

and the municipality of Kalundborg • The companies exploit each other’s by-products

and residuals on a commercial basis • E.g., 98% of the sulphur from the Asnæs Power

station is reused by plasterboard manufacturer Gyproc

Source: http://www.symbiosis.dk/en



Riversimple – A Sustainable Business Model in the Making



A Sustainable Business Model in the Making

Source: http://riversimple.com




Source: http://riversimple.com (pictures show technology demonstrator, not final product)

Wales-based car designer RIVERSIMPLE founded by Hugo Spowers aims to bring

about “mobility at zero cost to the planet”

“Whole system design” + new technology + new business model + new corporate governance




Concept car “The Hyrban” - Installed range: 220+ miles (350 km) - Top speed: 50 mph (80 km/h) - Weight: 520 kg - Number of passengers: 2 - Emissions, well-to-wheel: <31g CO2/km

Source: http://www.40fires.org (pictures show technology demonstrator, not final product)



A Sustainable Business Model in the Making • Affordable eco-mobility • Personal mobility as service • No hassle of ownership • A car that lasts

• Start-up: seed / venture capital

• Major revenue stream: monthly leasing fee

• Distributed manufacturing network with small facilities

• Open source approach • Local provision of cars owned

by Riversimple • Local refuelling network • Refuelling for free

“Use-oriented PSS”

“Designing a car for this business model requires us to sell performance, not just cars.”




Managed co-development and co-evolution of a whole ecosystem

- Technological artefact & infrastructure – Car & local refuelling network

- Business model – Eco-mobility as an all-in service

- Corporate governance – Open and stakeholder inclusive

Addressing major barriers to sustainable business model innovation

- Environmental and social externalities – How to provide zero impact mobility? → Offering eco-efficient mobility as hassle-free, all-in, fee-based service

- Capital intensity and long lead time – How to finance RD&D? → Patient capital from purpose-driven seed capital investors

- The power of incumbents – How to overcome path dependence of one century? → Non-exclusive, open source and network approach to create a “movement”




Business model innovation orientations employed

- “Maximise material and energy efficiency” → Light-weight construction, high-efficiency fuel cells and engines

- “Deliver functionality rather than ownership” → Riversimple owns the car, users pay an all-in fee

- “Develop scale-up solutions” → Open source approach, local, replicable production network

cf. Bocken et al., 2014



Where do we have to go? Future Research

1. Theoretical and conceptual integration of eco-innovation and SBM → elaboration on (dis-) similarities and overlap of both concepts

2. Understanding business models in their particular contexts → development of a contingent and context-sensitive approach

3. Assessing business models’ sustainability performance → development of methods for business model assessment

4. Test and evaluate business modelling tools and their outcomes → identify tools that (do not) work, e.g. in longitudinal studies



THANK YOU!

More about SBMs on

www.SustainableBusinessModel.org



Backup


www.SustainableBusinessModel.org 45 4 Nov 2015 Slide 45

A business model for sustainability helps describing, analyzing, managing, and communicating (i) a company’s sustainable value proposition to its customers, and all other stakeholders, (ii) how it creates and delivers this value, (iii) and how it captures economic value while maintaining or regenerating natural, social, and economic capital beyond its organizational boundaries.

Business Model for Sustainability Concept

Schaltegger et al., 2015



Business Model for Sustainability Concept

Normative requirements for business models for sustainability

1. The value proposition provides measurable ecological and/or social value in concert with customer value.

2. The supply chain involves suppliers who take responsibility towards their own as well as the focal company’s stakeholders.

3. The customer interface motivates customers to take responsibility for their consumption as well as for the focal company’s stakeholders.

4. The financial model allows a just distribution of costs and benefits among stakeholders and accounts for ecological and social effects.

Boons & Lüdeke-Freund, 2013



Literature Bisgaard, T.; Henriksen, K. & Bjerre, M. (2012): Green Business Model Innovation - Conceptualisation, Next Practice and

Policy. Oslo: Nordic Innovation. Bocken, N.; Short, S.; Rana, P. & Evans, S. (2014): A literature and practice review to develop sustainable business model

archetypes, Journal of Cleaner Production, Vol. 65, 42–56. Boons, F. & Lüdeke-Freund, F. (2013): Business models for sustainable innovation: state-of-the-art and steps towards a

research agenda, Journal of Cleaner Production, Vol. 45, 9–19. Breuer, H. & Lüdeke-Freund, F. (2015). Sustainability Innovation Pack. Online:

http://blog.ssbmg.com/2015/02/26/sustainability-innovation-pack/ Casadesus-Masanell, R. & Ricart, J. (2010): From Strategy to Business Models and onto Tactics, Long Range Planning,

Vol. 43, No. 2-3, 195–215. Chesbrough, H. (2010): Business model innovation: opportunities and barriers, Long Range Planning, Vol. 43, No. 2/3,

354–363. Johnson, M. (2010): Seizing the white space. Business model innovation for growth and renewal. Boston, MA: Harvard

Business Press. Johnson, M.; Christensen, C. & Kagermann, H. (2008): Reinventing your business model, Harvard Business Review, Vol.

86, No. 12, 50–59. Joyce, A.; Paquin, R. & Pigneur, Y. (2015): The triple layered business model canvas: a tool to design more sustainable

business models, ARTEM Organizational Creativity International Conference, 26-27 March 2015, Nancy, France. Lüdeke-Freund, F. (2013): Business Models for Sustainability Innovation: Conceptual Foundations and the Case of Solar

Energy. Lüneburg: Leuphana University.



Literature Osterwalder, A., & Pigneur, Y. (2009). Business model generation: A handbook for visionaries, game changers, and

challengers. Amsterdam. Schaltegger, S. & Burritt, R. (2005): Corporate Sustainability, in: Folmer, H. & Tietenberg, T. (Eds.): International Yearbook

of Environmental and Resource Economics 2005/2006. Cheltenham: Edward Elgar, 185–222. Schaltegger, S.; Hansen, E. & Lüdeke-Freund, F. (2015): Business Models for Sustainability: Origins, Present Research,

and Future Avenues, Organization & Environment, http://dx.doi.org/10.1177/1086026615599806. Schmidt-Bleek, F. (2000): Factor 10 Manifesto, http://www.factor10-institute.org/files/F10_Manifesto_e.pdf Upward, A. & Jones, P. (2015): An Ontology for Strongly Sustainable Business Models: Defining an Enterprise Framework

Compatible With Natural and Social Science, Organization & Environment, http://dx.doi.org/10.1177/1086026615592933.

Upward, A. (2013): Towards an Ontology and Canvas for Strongly Sustainable Business Models: A Systemic Design Science Exploration. Masters of Environmental Studies / Graduate Diploma in Business + Environment. Toronto: York University.

Wells, P. (2013): Business Models for Sustainability. Cheltenham: Edward Elgar Publishing. Wüstenhagen, R. & Boehnke, J. (2008): Business models for sustainable energy, in: Tukker, A.; Charter, M.; Vezzoli, C.;

Stø, E. & Andersen, M. M. (Eds.): Perspectives on radical changes to sustainable consumption and production. System Innovation for Sustainability. Sheffield: Greenleaf Publishing, 70–79.

Wysocky, K. (2014): Riversimple, the Welsh dragon that spits water vapour, http://www.bbc.com/autos/story/20141114-riversimple-the-welsh-dragon-that-spits-water-vapour
