Responsible and profitable kapittel 1

17

– Chapter 1

Creating sustainable business models

‘Go back where you came from!’ and much worse was heard on that infamous day. It was not only terms of abuse that rained down that day in 1988 at a football match at Bislett Stadium in Oslo – bananas did too. The target of all of this was a young dark-skinned football player called Caleb Francis. He was born in Mauritius and grew up in Lillehammer. He was to make his debut as a starter for Kongsvinger against Vålerenga, but it was in no way the experience he had looked forward to. The coach did not have any choice but to take him off the field to protect him from the racist attacks from the Klan, Vålerenga’s die-hard supporters. This match immediately put racism in football squarely on the agenda. For Vålerenga, it was a sad event and also the beginning of a campaign to reverse this direction that has had significant consequences, both internally for the club and for the rest of Norwegian football.1

The contrast between Vålerenga then and now is striking. In 2012 the club had 1700 members spanning 74 nationalities. Vålerenga is now an example of both a model for sports in particular and for other organizations in general.2 This is not only a result of its award-winning project, Vålerenga against racism (Vålerenga mot rasisme). Vålerenga has also started the Project for Inclusion (Inkludering-sprosjektet) that helps families struggling with their finances so that more will be able to afford to play football and to partake in other activities. Moreover, the club has established Job Chance (Jobbsjansen) that gives both work to youth who have dropped out of secondary school and health and language-training offers to women with a minority background. In 2011, Vålerenga had four person-labor years set up as its own department for corporate social responsibility. In addi-tion, it has several volunteers who also work on this. Vålerenga also has a range of cooperative agreements with both voluntary and public organizations, such as the Norwegian Labor and Welfare Administration (Arbeids- og velferdsetaten,

00 105558 GRMAT Responsible and profitable 150101.indb 17 27.07.15 13.29

chapter 1

18

NAV, a welfare agency), the National Hospital (Rikshospitalet), the Norwegian Radium Hospital (Radiumhospitalet), and the Salvation Army.

In this chapter we first discuss why it is so difficult for companies to combine responsibility and profitability, and we take a closer look at the problem with the existing approaches to this issue. Next, we discuss some strategies for sustainable business models, which is this book’s approach for finding new ways of combining responsibility and profitability. To begin with we use Vålerenga as an example of an organization that has solved this problem in an appropriate manner.

Vålerenga today defines itself as something more than a football club. At the same time it has clear ambitions of being a top club. Some important ques-tions in this context are thus: Is it successful in reaching its goals? Or have these efforts dedicated to the responsibility measures resulted in Vålerenga becoming a worse football team? There is much to indicate that Vålerenga is able both to take responsibility and to attain athletic and financial results. If we compare this club with other teams in Oslo, Vålerenga is in a class of its own. It is the only club from the capital that plays in the Elite League (Tippeligaen), its finances are stable, and it has a large and devoted body of followers. And not least important – perhaps because of its multicultural profile – it has attracted and resold several high-calibre players who are not of an ethnic Norwegian background. In 2008 Vålerenga bought the building site for a new stadium from the Municipality of Oslo for the symbolic price of a single Norwegian krone, and in the process of this project it stressed an environmentally friendly profile in the planning of the construction.

We claim that Vålerenga illustrates that it is possible to be both responsible and profitable – or to put it in words that suit this example better: both responsible and competitive. We do not say that Vålerenga is perfect – the club’s reputation has suffered some tarnishing, like most other organizations. One example of this was the controversy around the purchase of the player Veigar Páll Gunnarsson from Stabæk in 2011, when Vålerenga apparently carried out problematic transactions during the transfer. An indictment has been initiated against a number of athletic directors from both teams. This is an example only to show that Vålerenga is not immaculate. Nor are the other organizations we use as examples in this book. In our account of Vålerenga, we direct attention mainly to the many appropriate actions it has taken in order to move towards becoming a responsible organiza-tion, even knowing that the task to combine responsibility and profitability is by no means complete for Vålerenga or for any other organization.

The problem that Vålerenga has faced and the extensive efforts it has made to solve it is a problem that most other organizations can recognize. At the deep-


creating sustainable business models

19

est level, the problem is about attending to the organization’s achievement of its own goals while also attending to how other parties are affected by the company’s activities. It is expected that every company will use its resources efficiently. In addition to the demand of profitability, there are steadily higher expectations with regard to companies conducting themselves in a responsible manner. This implies that the pursuit of economic profitability must be combined with the considera-tions of social and environmental limitations.

These two objectives are reflected in this book’s title – responsible and profit-able – and show the dual goal-structure that most organizations today face. Most organizations, both those that are profit-seeking and those that are not, oper-ate for the most part according to principles of business economics. Public and non-profit organizations do not necessarily conduct themselves according to the demand for profits, but they do encounter the demands of productivity and of being efficient with their resources. These demands mean that public and non-profit organizations are also run to a considerable degree according to business principles. All organizations affect either directly or indirectly the environment in a way that necessitates awareness and action from the organization. This is to say that problems arise as a result of their activities, to which the organization must respond.

In the case of Vålerenga, it was the groupings among its supporters that con-stituted the problem. Vålerenga could certainly have laid the blame on the sup-porters, or on the lack of police and body of rules. It could have continued as it did before and hoped that racism and violence in the stands would diminish by themselves. Instead the club chose to make fundamental changes in the way it ran itself. In addition, Vålerenga entered into cooperative projects with other football clubs and with the Football Association of Norway (Norges Fotballfor-bund, NFF) in order to do something about the problem. In different ways, most organizations – if not all – will experience some negative social and environmen-tal consequences resulting from their presence and activities. Organizations can ignore these consequences, or they can take responsibility for them. One is not ordered to take responsibility – it is rather an alternative course of action among several from which the organization can choose. And in competition with other important considerations, many organizations choose to ignore the responsibili-ties towards society and the environment.

It is not for no reason that many organizations allow responsibility to be a lower priority. There are several strong incentives that work against the inclina-tion to act responsibly. Regardless of the objectives that business managers might have, they are expected to produce financial results in the relatively short term.


chapter 1

20

Attention will thus be directed towards the next measurement of performance: quarterly reports, annual reports, and so on. For companies listed in the stock exchange, the share price is a fairly immediate barometer of whether the finan-cial markets regard the manager’s allocation of resources as being conducive to profitability. This kind of pressure to deliver economic results is the reality of the current markets: so long as the dominant understanding of corporate responsibility is that it does not pay, there will be strong forces that work against responsibility. Thus there is a real danger that the attention paid to socially and environmentally conscious goals is suppressed systematically so that organiza-tions are not capable of realizing their intentions to conduct responsible and sustainable business practices.*

* We refer alternately to responsibility and sustainability when both are relevant. We take sustainability to be a developmental process where socio-cultural, environmental, and economic resources are attended to in a way that makes possible the meeting of the needs of both the present and the future. We understand the concept of responsibility as being more fundamental than sustainability, in the sense that we can talk about individuals’ and organizations’ responsibility to conduct themselves in a manner that is conducive to sustainability. For companies, both are used to refer to strategies and objectives for social and environ-mental performance.

Bilde 01

sustainability: a developmental process where socio-cultural, environmental, and economic resources are attended to in a way that makes possible the meeting of the needs of both the present and the future{b}

responsibility: individuals’ and organizations’ responsibility to conduct themselves in a manner that is conducive to sustainability



21

In the following, we take a closer look at the relationship between responsibility and profitability. In particular, we examine how these two goals can come into conflict – or at least are seen to be in conflict, both in theory and in practice (as the cartoon illustrates). Companies have little leeway when it comes to taking steps that reduce their profitability. This is especially the case for businesses that are required to conduct themselves according to the Limited Liability Companies Act. Consequently, this perceived conflict between responsibility and profitability is often dealt with in one of two ways. One way is to prioritize profitability over responsibility and sustainability so that comprehensive efforts to advance the company’s social and environmentally friendly measures are not carried out if they are too costly. The other involves a perspective on responsibility and sustain-ability where economic considerations overrule them; that is, they are in reality ‘colonized’ by the company’s economic objectives. As a result, only those measures that are expected to contribute positively to profitability are set into motion. We believe that both of these approaches have considerable problems in themselves and that there is therefore a need for new ways of thinking about the relationship between responsibility and profitability.

Responsible and profitableResponsibility and sustainability have been placed on the agenda in both private and public-sector debates, and thus the argument for why responsibility is a topic that deserves our attention almost becomes redundant. An essential question is, however, if this increased attention translates into better approaches for dealing with the issues connected to making businesses more responsible. We believe that there are three prominent characteristics within the existing approaches to responsibility and sustainability that are particularly problematic. These include:

1. Challenges related to how responsibility can be integrated in the company’s core operations.

2. Challenges related to the growth of micropractices for responsibility, that is, structured solutions and tools for corporate responsibility.

3. Challenges related to the understanding of responsibility and sustainability.

We believe there is a need to approach the relationship between responsibility and profitability in new ways and that these three challenges are central. We discuss each of these three elements in the following.

First, we argue that corporate social responsibility (CSR) has been treated as a mere appendage to many companies’ activities, instead of as a part of their core


chapter 1

22

activities. This means that evaluations of responsibility and sustainability are not carried out as a part of the development of strategies and business ideas but instead are done reactively – rather like a brake pad that sets limits for the realization of strategies (cf. Ulrich, 2004). Traditionally, the relationship between profitability and responsibility has been understood as a trade-off. Responsible operations are seen as an expense for the company in the sense that it precludes opportunities or practices that could have made the company even more profitable. Most organiza-tions’ business models are designed one-dimensionally for generating profitability, and responsibility is a secondary consideration. Taking corporate responsibility is thus seen implicitly as something that organizations should be doing only if it can directly or indirectly contribute to improved profitability.

An organizational design that is one-dimensionally directed towards creating profitability can have several dysfunctions. For the sake of comparison, we can turn to Peter Wessel Zapffe’s (1941) example on the species of red deer cervus giganticus. Through evolution, this animal had developed larger and larger ant-lers, which is a sign of strength and virility. By itself, this would be seen to be advantageous for the deer. The problem, however, was that the antlers became so large that the deer could no longer carry them and so the species died out. The example illustrates the dangers of one-dimensionality: the maximization along one dimension can undermine the performance along others (cf. Ims & Zsolnai 2006). In this way, organizations that are designed to attain greatest possible profits can pay too little attention to other modes of goal-attainment that the business is also dependent on for survival. This can ultimately undermine the company’s sustainability – both in the sense that it can threaten the company’s own interests and in the sense that it can lead to significantly negative effects on the environment and society

In this book we emphasize, therefore, that responsibility must be integrated in the company’s core activities. This contains two aspects. First, it means that the company’s strategies and initiatives of responsibility must have their starting point in the consequences that are created by the company’s activities. This applies to both positive and negative consequences for society and the environment. Sec-ondly, it implies that the company’s approach to responsibility must be anchored in both the strategic and operational levels. Responsibility and sustainability must not, then, be separated from strategic and operational decisions and activities but must in a real sense be integrated in them. We are not the first to have argued for an integrative approach to responsibility. This is a widespread view among both academics and many organizations. Yet in this book we want to argue for a spe-cific approach for the integration of responsibility: the business should address



23

the question of responsibility at the business-model level. This entails integrating responsibility in the way the company creates, delivers, and captures value.

This leads us to the second main element in our approach. Corporate respon-sibility has now matured as a field of study so that today there are several specific tools and institutions that have been developed in order to help companies deal with the issues involving responsibility and sustainability systematically. We can name a few here, like United Nations Global Compact (UNGC) and World Busi-ness Council for Sustainable Development (WBCSD), standards like ISO 26000 and Global Reporting Initiative (GRI) and principles such as Equator Principles. These kinds of institutions form the foundation for micropractices in the busi-ness that are essential for practising responsibility. It is in itself very valuable to develop the knowledge relating to the adoption, implementation, and implications of these kinds of tools.

All the same, we claim that the increasing attention paid to these kinds of micropractices does not necessarily make companies more capable of solving their unique problems of responsibility.* The point of departure for responsible measures must be a thorough understanding of the accountability relationships of responsibility that result from the company’s activities, or the possibilities the business has for solving social or environmental problems. This requires a great deal of attention to the formulation of the business’s problems relating to respon-sibility before one can find the specific solutions for addressing these issues. Thus, standardized tools and similar practices can in reality be merely cosmetic, and can actually obstruct more fundamental changes in the company. Accordingly, we have set this book on another level of abstraction in the sense that we are more oriented towards business models than the operational level. We have done so by researching the relationship between responsibility and profitability in the way the company functions. In this way we also illustrate the implications of respon-sibility for the design of the organization with respect to strategy, management, and organizing.

Thirdly, we argue that there has been a shift in both theory and practice from discussions about what the company is responsible for to what the company can take responsibility for. That businesses can take responsibility implies that compa-nies can contribute to sustainability or can contribute to solving social and environ-

* In the recent report submitted by the Scandinavian grocery chain REMA 1000 to the Initiative for Ethical Trade, administrative director Ole Robert Reitan asserts that standards like SA 8000 (Social Accountability 8000) are insufficient for guaranteeing responsible business practices among sub-suppliers (cf. Initiative for Ethical Trade). This is not an argument against having these kinds of standards, but it illustrates the need for an overarching approach to responsibility that goes beyond just living up to standards.


chapter 1

24

mental problems. This shift towards talk of how companies can take responsibility has coincided with new concepts that have found a foothold in the academic and public debates on corporate responsibility. This is primarily due to Porter and Kramer’s (2011) perspective of ‘Creating Shared Value’, which is a self-designated successor to corporate responsibility. Moreover, we see that the concept of ‘sus-tainability’ is used more frequently in contexts where corporate social responsi-bility was used before (cf. Strand 2013; Kiron et al. 2012). We can say that these developments reflect the shift from looking at responsibility as a set of problems that have to do with the distribution of responsibility to seeing it as a space for possibilities that has to do with business opportunities. There is more stress placed here on how companies can make money by initiating strategies that either are or appear to be sustainable. This changes significantly the understanding of what the company’s corporate social responsibility is supposed to be and it is probable that it has substantial implications for the choices companies make with regard to responsibility and sustainability.

In this book we argue that if it is only the image of responsibility that motivates the company, then we find ourselves with something that is far weaker, a mere chi-mera. We assert, therefore, that discussing sustainability without emphasizing the ways in which companies actually have the responsibility to be sustainable makes us less able to solve the problems we face, whether they are social, environmental, and economic. Our specific hypothesis is thus that the results of firms designing their operations in a way that minimizes the negative consequences for the envi-ronment and society will have a larger effect than if companies were to identify and exploit the opportunities for making money by being sustainable. These two paths are not, of course, mutually exclusive – companies can certainly do both at the same time. Nonetheless, we maintain that the social and environmental prob-lems that companies play a role in creating can most effectively be dealt with by companies being oriented towards doing something with the ways they contribute to the problems. This is central to our understanding of corporate responsibility, which begins precisely with the companies’ positive and negative effects on society and the environment, and the responsibility that attends these effects.

Strategies for sustainable business modelsThe example given above of Vålerenga demonstrates an organization that has gone a long way in the direction of designing and implementing what we call a sustain-able business model. It has accomplished this by making comprehensive changes in what it offers its customers, how it delivers these in practice, and the ways in



25

which it creates value for itself, its customers, and other stakeholders. Later in the book we go into further depth on what the characteristics of sustainable business models are, and we define these characteristics more explicitly. For now, however, we shall employ this main working definition:

The term ‘sustainable business models’ refers to organizational designs where the company’s social and environmental effects are an integral part of the company’s way of creating, delivering, and capturing value.

This implies an understanding that the positive and negative effects of the com-pany’s commercial activities arise as a result of the business model, and that they ought to be dealt with as a part of the design of the business model. This combina-tion of considerations for profitability and responsibility make up the core of this book, which is built around the following three questions:

1. What is a sustainable business model?2. How can businesses design sustainable business models?3. How can sustainable business models be put into practice?

In order to bring us closer to an understanding of what sustainable business models are, we shall in the next chapter look in depth at two theoretical building blocks: business models and corporate responsibility. Seen both in isolation and from the company’s perspective, these two phenomena appear to pull in different directions. In this chapter we consider the role these two building blocks play in organizations. We must therefore briefly clarify the concepts of ‘business model’ and ‘corporate responsibility’.

A business model is, in short, the conceptual framework for how the company seeks to create profitability – by offering and delivering value that is attractive to the customers and by charging customers in a way so that the business is left with an acceptable profit. Each organization bases itself either consciously or unconsciously on a business model that specifies what the company will deliver, whom it will deliver it to, how it will deliver it, and thus the way in which and to what degree value is created for the customer and profitability for the company. A business model can, therefore, be seen as the motor in the company’s quest for profitability. In contrast, corporate responsibility refers to the company’s approach to social and environmental performance. This has to do with how the company attends to and affects the environment and society, both positively and negatively. This is based on a stakeholder-oriented understanding of the company at hand. Who is affected by the companies’ activities? What are their interests? And what does this mean for the company’s strategy and activities? Corporate responsibility


chapter 1

26

is thus oriented towards making sure that the company’s activities are designed in a way that minimizes the negative aspects and promotes the positive effects on society and the environment.

On the basis of these two building blocks we shall demonstrate the challenges involved in designing sustainable business models. In practice it involves combin-ing two phenomena that initially pull in different directions but can be united in such a way that the different forms of goal-attainment still advance the company’s performance as a whole. The two building blocks are illustrated by the first two cogwheels in Figure 1. The first two parts of the book address the relationship and interplay between these cogwheels, which represent the two synchronous move-ments in the direction of profitability and responsibility. The main objective is to illustrate how companies can move themselves into the self-reinforcing space where responsibility advances profitability and where profitability makes investment in responsibility possible. We shall argue that by an appropriate integration, corporate responsibility can enable a company to exploit business opportunities that would not have otherwise been available to it. In this way we show how responsibility

Figur 1

Business model

Corporate responsibility

Strategy, leadershipand organization

Figure 1: An overarching model for sustainable busi-ness models



27

and profitability – even if they seem initially incompatible – can be combined at the business-model level for the simultaneous attainment of economic, social, and environmental goals.

In an economic perspective, it is common to understand these types of goal-attainment as excluding each other in part. In other words, there is a notion of a trade-off between responsibility and profitability. This is illustrated in Figure 2.

Line X in Figure 2 shows the trade-off between being profitable and conduct-ing oneself responsibly. Responsibility has traditionally been seen as a cost at the expense of the company’s profitability – at least in the short term. The relationship between responsibility and profitability has thus been conceptualized as a win-lose situation, where more of one means less of the other. Accordingly, point a shows a compromise between responsibility and profitability, while point b shows a situa-tion where consideration to the company’s profitability has been prioritized over the taking of responsibility. As we shall illustrate in this book, companies that are perceived as responsible can also attain valuable advantages that are unique to this type of company (cf. Frank 2004). Thus responsible operations can, under certain circumstances, be translated into economic gain. The model illustrates this with line Y. The farther one goes to the right along line Y, the more one looks after considerations of both profitability and responsibility. Point c shows, for instance, a situation where the company is both more responsible and more profitable than in both point a and point b. This book’s aim is to explore how companies can design and implement sustainable business models that can create win-win situations, where more responsibility can lead to more profitability. Ide-

Figur 2

Xb

a

d

––

+

+

Profitable

Responsible

c

Y

Figure 2: The relationship between responsibility and profitability


chapter 1

28

ally, one would wish to move along as far as possible up towards the right in the diagram. Point d shows, for example, a situation where profitability is prioritized over responsibility, but also that point d is still better than both points a and b, even if it means less responsibility than point c.

In this book we have sought to approach this relationship between responsibil-ity and profitability in new ways. We therefore examine the possibility of moving along line Y in Figure 2. How can responsibility contribute to – instead of hinder – the company’s profitability so that one can move beyond the trade-off we describe above? We shall argue that it is necessary for responsibility to be integrated into the company’s business model and we shall discuss how it can lead to commercial advantages for the company. For example, we shall show that responsibility can create fertile ground for new products and services – or, to put it briefly, increased customer value. This could be about new products in the specific sense. Or it could be about customers’ experiences that are, say, connected to buying a season ticket to Vålerenga’s games while at the same time feeling good about contributing to the integration of minorities in the Oslo area. Responsibility can further broaden the company’s customer basis. It can lead to new and better ways of working or motivating employees, and the net effect could be that responsibility is translated into new sources of profitability for the company. We shall provide a number of examples of how companies, by being responsible, can create and offer value that they would not have been able to offer had they not been.

At Vålerenga there are many things that indicate that it is on the way towards creating a sustainable business model by integrating responsibility measures into their core business practices. This might have led to more spectators and a greater access to talent from different cultures because Vålerenga is a club that is easier – and more desirable – to identify with. For the same reasons, the club attracts increased income from sponsorship and from a city that is very willing to cooper-ate. Its members play football against the same rivals and they use the same uni-forms. But because they have redefined what the club is – and how the club delivers – they have managed to mobilize new resources and initiate activities that raise their profile. At the same time they have reduced some of the expenses and have at least maintained their level of income. In the following section, we present an overarching framework that explains how such organizational developments occur. We aim, then, to show how other organizations can carry out similar changes.

The first two parts of this book are concerned with what sustainable business models are and how they can be designed. In Part 3 we address the challenges involved with implementing a sustainable business model in an organization. This is represented by the third cogwheel in Figure 1. As with any organizational



29

change, it is not sufficient to design a sustainable business model. In addition, we argue in this book that there are principally three conditions that must be present for promoting goal-attainment.

– Strategic reformulation– Value reorientation– Reorganization

First, for one to be able to change the way the company operates in a real sense, it is necessary for the change to be anchored in the company’s strategy. Making the company responsible in a real sense will typically lead to a redesigning of the company’s strategic goals, as well as the means that accompany these. Strategy is about finding, formulating, and solving problems (Jørgensen 2011) and the com-pany’s understanding of the problem will typically be changed by the emphasis on responsibility and sustainability at the strategic level. Furthermore, the transition to responsibility will typically require leadership that leads a reorientation of the efforts, motivation, and attention of the organization’s members towards the goals that have been set and the values that underpin them. Finally, a change in the business model will have implications for how the business chooses to reorgan-ize itself in order to advance the performance of the business model (Foss et al. 2012). Both the organizational structure and the management control practices in the company will have to be adapted to changes in the understanding of the company’s performance. Each of these three topics – strategy, management, and organization – will be addressed in Part 3.

Overall, this book seeks to develop a holistic model for designing and imple-menting sustainable business models. What all organizations have in common is that they have – either consciously or not – a business model that reflects how they create, deliver, and capture value. They can choose to keep this business model as it is or they can choose to develop it. Below we explain how changes or innovations in a company’s business model will often lead to a new answer to the question: ‘What’s the problem?’

‘What’s the problem?’ as an approach to responsibility and profitabilityPeople and organizations have, on the one hand, a strong ability to adapt and innovate, but, on the other, we have a tendency to hold onto the status quo, even in situations where we should clearly act in new ways. After a change has occurred, it


chapter 1

30

is often easy to think: why didn’t we do this earlier? There is a well-known parable about a clever method for catching monkeys without inflicting physical injuries which illustrates our way of understanding what the problem is and finding new solutions. The method of capture involves the use of heavy pots with long and narrow necks. A handful of sweet nuts that smell good are placed in the pots, which are then placed deep in the jungle. The monkey is attracted to the smell and sticks its hand into the pot, grabbing a fistful of treats. Yet the neck of the pot is so narrow that the monkey will have to release the nuts if it is to remove its hand. Because the nuts are so tempting, the monkey will not let go. The pot is also too heavy for the monkey to carry it away, and so the monkey becomes easy prey for the catcher.

We can see that the monkey is a prisoner of its own thought processes, or what we in this book call a problem space (Kaufman 2006). The problem space refers to the scope we set around a problem to define what the problem consists of (cf. Simon & Newell 1971). For the monkey to be able to free itself, it must redefine the problem and think and act in a new way so that it can free itself from the mental model of which it is captive. It is easy to laugh at the simple-minded monkey that does not understand what is best for it. Yet in the same way that the monkey is a prisoner of its own understanding of the problem, individuals and organizations also encounter problems where the existing mental models that they have based themselves on hinder their ability to understand what the problem consists of. We even regularly place ourselves in paradoxical situations where the solution of what we take to be the problem is actually the problem itself.* We must, then, find new ways of formulating the problem by challenging the basic assumptions that we take for granted in a difficult situation. It does not help to be oriented towards solutions if one is trying to solve the wrong problem.

Problem-solving is central to organizations – in a sense we can think of organiza-tions as problem-solving systems (Blau & Scott 1962). This means that the choices, decisions, and actions that organizations and the individual actors in organizations make are in the end about solving the various problems they face. A company’s will and ability to change itself are about, therefore, reformulating the fundamental problems it is trying to solve, and in doing so changing the way it tries to solve them. According to a survey carried out by the consulting firm Innosight, an average

* An example is the use of economic rewards in situations where people have an intrinsic motivation for per-forming a task. In these cases the intrinsic motivation for the task can be ‘displaced’ by economic reward so that the individual’s motivation becomes lower than it was in the beginning after the reward is given (see e.g., Frey 1997). Thus, the solution (i.e., economic reward) is a part of the problem (i.e., low motivation).



31

company on the S&P 500 lasts for 18 years on the index. In 1980 the companies remained on the index for an average of 25 years, while the corresponding number in 1958 was 61 years (Foster 2012). An earlier version of this study is described by Richard Foster and Sarah Kaplan (2001) in their book Creative Destruction. The title is an expression from Schumpeter’s (1942) theory of innovation, where creative destruction describes how growth in the capitalist economy is created precisely because the earlier practices collapse. If we look closer at the changes in the S&P 500 over the last ten years, companies with long, rich traditions like Kodak, Com-paq, Quaker, and Sears have had to make way for companies like Google, eBay, Netflix, and Priceline.com. As a reaction to this development, researchers in this field have asserted that companies must reinvent their operations before it is too late (Nunes & Breene 2011; Johnson et al. 2008). An important part of this innova-tion concerns destroying existing activities and getting rid of what today appear to be successful parts of their operations (Govindarajan & Trimble, 2011). The survival and growth of organizations are dependent on whether the management is able to adapt the organization according to changing demands and expectations of their surroundings (cf. Meyer & Stensaker 2011).

In Theodore Levitt’s (1960) landmark article, ‘Marketing Myopia’, he describes how whole industries were obliterated because they had ignored substitutions, that is, other products and services that can cover the same needs as the companies’ own products. Who would have believed only a few years ago that Coca-Cola and Pepsi would be challenged by bottled water? And who would have thought that apps on smartphones would compete with both gaming consoles and newspapers? Product and service innovations are in themselves interesting, but we would like to turn our attention to business-model innovations, which refers to changes in what organiza-tions deliver to whom and in what way – that is, changes in how businesses create, deliver, and capture value. Examples of this are actors like Skype and Google, which have challenged existing companies like AT&T and Microsoft. These newer compa-nies have not necessarily become challengers on the basis of technological changes or product and service innovations. Instead, what is noteworthy is that they have made fundamental changes in how they charge customers for their services, how their services are delivered to their customers, and so on. Technologies or products can have latent value, but businesses need to build suitable business models around the technology or product in order to unlock the value to the advantage of both the customer and the business (Chesbrough & Rosenbloom 2002).

We have already described how Vålerenga has changed its business model by integrating corporate responsibility into its core activities. We can view this as an innovation at the business-model level because it has changed what it deliv-


chapter 1

32

ers to the customer and how it delivers it. In the next phase, these changes made Vålerenga capable of capturing new value by mobilizing new resources and explor-ing new business opportunities. We believe that the mechanisms underpinning these changes, as well as organizations’ lacking ability to understand and change themselves, can be explained with help from the problem-solving perspective. Furthermore, organizations can use this perspective in order to approach exist-ing and potential problems in new ways. In this way, organizations can increase their competitiveness.

Interface: A sustainable business-model innovationHuman decision-makers are, of course, far more sophisticated in their approaches to problems than the monkey in the example above. Nonetheless, it is not difficult to find good examples of individuals and organizations that are unable to take the necessary step back and to pose the basic question: ‘What’s the problem?’ Instead, we are so fixated on what we believe to be the solution that we can overlook the problem that we would actually like to solve. Most profoundly, this reflects the human tendency to be too solution-oriented, which leads to the risk that we might solve the wrong problem (Mitroff 1998; Mitroff & Silvers 2009).

For the sake of illustration, let us look closer at a business manager who rec-ognized what the problem was, reformulated it, and thereby created a business model that was innovative and socially responsible. In 1994 Ray Anderson, the now-deceased founder and chairman of the board of Interface, which is a large American producer of carpets, was asked to comment on the company’s environ-mental vision in an internal meeting. As inspiration for his speech, he turned to Paul Hawken’s The ecology of commerce. It struck Anderson that the company had been in operation for 21 years and not only did it lack an environmental vision, it was quite plainly an environmental villain. This was an eye-opener, and it led him to a vision of reducing Interface’s ecological footprint to zero by 2020 (‘Mis-sion zero’). This demanded a wholly new way of thinking and an entirely new business model to run this company. In addition, it involved the company doing what we shall later in this book describe as servitization, by Interface introducing the offer to the customers to take their old carpets away in order to recycle them. The surprising side effect for Interface was that it became the cost leader in this industry because of these changes. It gave the lie to those who predicted that these efforts would be too costly. Thus, Interface became more profitable by staking its activities on responsibility – a decision that was apparently taken without any consideration whatsoever of profitability.3



33

The stories of Interface and Vålerenga illustrate that the first step on the way to solving individual and organizational problems – not to mention social prob-lems – is to recognize that there are deficiencies within one’s existing approach. For the companies, it means that the existing business models are not well suited to solving the actual problems. The way forward is to formulate the problem anew by asking fresh questions that make one see the problem from different angles. In this way, one can create fertile ground for new business models. This kind of problem-orientation and explorative attitude has received support from research on creativity and innovation (Dyer et al. 2011; Kim & Mauborgne 2005). Both Vålerenga’s turnaround operation and Ray Anderson’s changes at Interface illustrate this approach.

Unlike the monkey, Vålerenga and Ray Anderson recognized that they had a problem and understood that they had to reformulate the problem in order to find new solutions. Moreover, they took to heart the idea that they had a responsibility for changing the way they did business. This recognition compelled them to see that they could not defend the way they had run their businesses. Both organiza-tions understood that they had to make fundamental changes – in other words, they had to solve new problems in new ways. While the monkey stayed stuck, clutching the nuts, and was eventually captured, both Vålerenga and Ray Ander-son managed the feat of freeing themselves from ‘the way that it has always been done’. A special challenge that we consider in this book is to change a business model before there is a need to do it. The research literature on business-model innovation shows that it is often the newcomer to an industry, such as Skype or Google, that manages to reformulate how one solves a given problem (Christensen 1997). While newcomers change the rules of the game, the established actors exhibit a tendency to cultivate core competences. As a result the established actors do not manage to create the necessary changes. Existing enterprises therefore might need to innovate business models proactively so that they do not become victims of their own success.

Seen in this way, Vålerenga and Interface are examples of how new understand-ings of a business’s problem can lead to innovations at the business-model level. Furthermore, they illustrate the interplay between responsibility and profitability in these businesses and how they manage to combine the two apparently contra-dictory considerations in business models. By looking at the problem in a new way, with the question of responsibility taken seriously, they arrived at a situation where they managed to create innovative strategies. Interface’s reversal opera-tion enabled it not to be dependent on oil, a costly resource. It also bases today’s production almost entirely on renewable materials. These and other measures


chapter 1

34

have led to lower costs, which again have contributed to increasing the creation of value. At the same time, it has acquired a unique market position that makes customers perceive that the value of the product has gone up. This increases the value creation even further. In these ways, Interface has been able to create, deliver, and capture value in a way that is both responsible and profitable.

The example of the monkey shows that we let ourselves become trapped within mental models on many different levels – everything from simple, prac-tical problems to complex problems at the systemic level. To move ahead, one has to break away from the current mental model. A good example of this is Jotun, which has seemingly been inspired by Theodore Levitt’s classic statement: ‘People don't want to buy a quarter-inch drill, they want a quarter-inch hole.’ In the same way we can say that Jotun’s customers do not want paint; they want a painted house. This has led to Jotun now offering to paint customers’ houses for them, and in doing so earn profits on the paint, the painting job, and the painting equipment. At the same time, it has reduced the spillage and use of paint because the job is done by professionals. In this way, Jotun’s ecological footprint becomes smaller than if the customers were to have done the painting themselves. This is how individuals, departments, and product and service developers can also take certain measures to see the problems they are trying to solve now in terms of how these can be formulated anew, and how this can lead to innovative and responsible strategies.

What’s the problem with responsibility and profitability?In the last decade the connection between strategy and corporate responsibility, including the question of whether responsible business operations can promote profitability, has been the object of a substantial amount of research and public debate. Even if only a few studies have shown conclusive results on a positive connection between responsibility and profitability (see e.g., Orlitzky et al. 2003, Eccles et al, 2014), a kind of consensus has been established that corporate respon-sibility can be a source of competitive advantage. Yet this often leads to a narrow conception of corporate responsibility, where responsibility is reduced to a tool for advancing the business’s economic performance (Jørgensen & Pedersen 2011a). This can be exemplified by an expression from the website of Innovation Norway (2009), where one can read that: ‘more and more firms in addition are adopting corporate social responsibility as a tool for increasing their creation of value – and not only to avoid a bad reputation.’



35

This encouragement to ‘use’ corporate responsibility as a strategic instrument is pervasive in the literature on business administration. It rests on an understanding that strategies for corporate responsibility have a positive relation to the business’s profitability and reputation. At the same time, there is disagreement around the explanations for why and how responsibility contributes to the bottom line. Com-panies are not homogeneous, and there is reason to believe that there is significant variation among companies when it comes to whether it is economically rational or favorable to a reputation to invest in corporate responsibility (cf. Barney 1991; Teece 2009). And not least, one can problematize whether profitability and repu-tational gain ought to be the motivation for responsible conduct. Regardless, there is a need for more knowledge surrounding the conditions that must be in place so that corporate responsibility makes sense even from an economic standpoint, and the conditions that promote the business’s ability to succeed in this.

Our argument is that the question of whether responsibility leads to profit-ability is the wrong question to ask. To begin with, as we shall elaborate in this book, the contribution to profitability should not be the criteria for whether the business should act responsibly. Furthermore, we shall argue that responsibility does not need to be profitable in itself. Rather, responsibility should be seen as an element in the firm’s business model, which means that it can contribute to the company’s ability to create, deliver, and capture value.

This sort of understanding of the business enables a number of parallel under-standings as to why businesses might engage with corporate responsibility: it can lower the company’s risk; it can be a relevant product or service attribute for the customer; it can be a necessary ‘hygiene factor’ that must be in place for the company to be able to compete at all; it can work as a motivational factor for employees; it can originate in an understanding that the company must be sustainable in order to secure the future basis of resources; and so on. The point is that responsibility initiatives must from the start be understood, developed, and evaluated in terms of how they fit into the company’s business model and what role they play there. For Vålerenga the responsibility measures grew out of a crisis and were aimed at restoring trust among a number of the club’s stakehold-ers. For Interface, however, it was Ray Anderson’s recognition of the extensive damaging effects that the company was inflicting on the environment that led to the company being changed. Responsible thinking was thus the driving power for developing a new business model – for different reasons, in different ways, and with different results. We aim, therefore, to contribute to the understanding of corporate responsibility as an organizational phenomenon.


chapter 1

36

The structure of the bookThis book aims to contribute to an understanding of what sustainable business models consist of, and how they can be designed and implemented. We have summarized this as three main questions earlier in this chapter. In this book’s main model (Figure 1) we have illustrated how this tripartite objective is taken up in this book’s first three parts. As Figure 1 suggests we regard the design and implementation of sustainable business models as a recurring process, whereby the company recreates itself repeatedly. This involves the changes in the way they create, deliver, and capture value. As this book will claim, this is primarily about a union of strategies and goals for both responsibility and profitability, and second-arily the strategic, managerial, and organizational choices that result from this.

Part 1 – ‘What is a sustainable business model?’ – comprises the first two chap-ters. In this chapter we present to the reader the theme of this book and its objec-tives, while also giving practical examples that illustrate what sustainable business models consist of. In Chapter 2 we present the two theoretical building blocks on which this book is based – business models and corporate responsibility. Next we discuss how business models and corporate responsibility relate to responsibility and profitability. Chapter 2 concludes with our perspective on sustainable business models and how this differs from other existing approaches. In this manner, we stretch out the canvas that this book is written on by laying the foundation for our exploration of how businesses can design and implement sustainable busi-ness models.

In Part 2 – ‘How to design a sustainable business model?’ – we deal more practically with the concepts that are introduced in Part 1. In Part 2 we attempt to enable the reader to analyze and diagnose businesses from a business-model perspective in general and with a view to responsibility in particular. In Chapter 3 we present a perspective that gives the reader tools to identify and understand companies’ business models. This entails breaking down the company into the components that make it able to create, deliver, and capture value. Following this we examine the phenomenon of business-model innovation by showing how one can go about reformulating how an organization creates, delivers, and captures value. In Chapter 4 we discuss in detail three relevant dimensions of corporate responsibility – motivation, integration, and effect – in order to demonstrate how companies can invest in corporate responsibility for different reasons, in different ways, and with different results. This is a question of understanding why compa-nies invest in corporate responsibility, how responsibility measures are integrated into the company, and what effects it can have for the company. On the basis of this framework, companies’ practices of corporate responsibility can be analyzed



37

and appropriate objectives for this practice can be formulated. In Chapter 5 we aim to connect knowledge of business models, business-model innovation, and corporate responsibility. We shall clarify what we consider characterizes sustain-able business models, and through examples and theory we shall illuminate how these innovations are created.

Together, these chapters constitute the foundation for Part 3 – ‘How to implement a sustainable business model?’ – where we discuss implications for organizational design with a view to strategy, leadership, and organizing. We argue in Chapter 6 for a perspective on strategy whereby the reformulation of the company’s fundamental problems is central. We show how a genuine integration of responsibility in the company leads to a new understanding of the strategic problems it aims to solve. In Chapter 7 we discuss how these strategic changes also necessitate the reorientation of the attention, motivation, and efforts of the company’s organizational members. This requires leadership that changes the understanding of what the company is and will be in the future, as well as the understanding of the values that will be protected and realized through the company’s operations. In Chapter 8 we address how changes at the strategic level have implications for organizing. We argue that the company’s organizational structure and leadership must be changed in several ways in order to adapt strategies to responsibility.

Finally – in Part 4 – we summarize the book with a framework for sustainable business models. In Chapter 9 we draw together the main themes of this book in order to provide a fundamental perspective of what characterizes sustainable business models and how they can be designed and implemented in businesses and other organizations.


Responsible and profitable kapittel 1

Documents