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Five steps to a sustainable business model Written on . Posted in Innovation.

Five steps to a sustainable business model
Summary : Companies are making significant progress in implementing sustainability. And yet, many are still far from being a sustainable company. The opportunities are enormous. Read how you can take a holistic approach and unlock new growth potential.

Content

What is a business model?
What is sustainable?
What is sustainability?
When is a business model sustainable?
Examples of sustainable practices and business models
Are sustainable business models competitive?
How do sustainable business models work?
What is circular economy?
Why should you adopt a sustainable business model?
What is greenwashing?
Are there examples of sustainable business models?
How to get to a sustainable business model
Step 1: Develop a narrative
Step 2: Map the organization and the extended environment
1.Understanding the ecosystems
2.Influence different trends and dynamics
3.Design scenarios
4.Examin the viability
5.Identify critical points
6.Materiality matrix
Step 3: explore options
Step 4: Select options,test
Step 5: Roll out business model
Outlook

What is a business model?

A business model is a description of how an organization makes money. It describes the value, how it is generated and delivered to the customer, and how the activity is on economically sound footing.

It is the description of specific activities that an organization performs to satisfy customer needs.

What is sustainable?

Meeting the needs of current generations without compromising the needs of future generations. It means conserving and protecting the current resources and biosystems on the planet so that they will be available in the future. It means balanced and fair coexistence, education, health, and a decent standard of living. sustainable

What is sustainability?

Sustainability is the ability to exist in a relatively permanent way in various areas of life. The term originates from a 1987 report (Brundtland) about the tension between humanity's quest for a better life on the one hand and the limits set by nature on the other.

Over time, sustainability has been framed in three dimensions, namely social, economic and environmental.

three dimensions of sustainability

Sustainability is used to express whether something is sustainable. It includes concepts of resource conservation, regeneration, and resilience.

When is a business model sustainable?

Business models serve to create value for customers. Milton Friedman had coined the term sharholder value. Here, an organization, a business model is just a vehicle to enable profits for the owner or shareholder.

It has been shown in many cases that this one-sided view leads to problems. Often, the true costs are not borne by the business model. Global warming or plastic waste are just two examples.

Most business models are incomplete.

Most business models are incomplete. This is because they do not take into account a company's impact on the world or the impact on the company itself.

Sustainable organizations are accountable for all the impacts they create. No company operates in isolation; it exists in an ecosystem. It has a supply chain. It is in a regional community. It has partners and customers.

A sustainable business model creates value not just for customers or shareholders. It takes into account all stakeholders and uses resources carefully.

Sustainable business models represent a comprehensive and holistic concept. They involve multiple stakeholders in society and show consideration for the environment.

network

Sustainable organizations do well to consider and measure the impact of business practices on the environment and stakeholders.

Examples of sustainable practices and business models

Sustainable business models describe the approaches and activities to generate the intended benefits for customers and stakeholders.

Typical examples include long-life products, shared use of products, or compact product volumes to reduce transportation.

Sustainable business models reduce or minimize risks. Unsustainable practices carry inherent risks, such as negative public opinion, customer loss, or supply chain disruption. These risks have received little attention.

Are sustainable business models competitive?

Often, only higher costs are seen when more sustainable practices or materials are used. This leads to a fear of losing competitiveness. The fear may be supported by competitors where sustainability has not yet played a role.

Innovations that lead to sustainable business models initially cost something. This is just like any other strategy. However, the potential to generate value is much greater than without sustainability. The initial costs are quickly recouped.

value capture

There may also be new entrants who have understood how to create a transparent, sustainable offering. Then you will soon be out of the game with a non-sustainable or less sustainable business model.

How do sustainable business models work?

Organizations with sustainable business models take a hard look at every aspect of their operations and ask themselves how they reduce their impact on people and nature. They do this, for example, by relying on closed-loop material cycles, using renewable energy, minimizing transportation, making durable products. They are careful in the selection of upstream suppliers and know the stages to the customer and customer usage patterns.

What is circular economy?

Circular economy involves slowing, reducing and closing material and energy cycles. The goal is to minimize resource use, emissions and energy waste. This is achieved through durable design, maintenance, repair, reuse, refurbishment, overhaul and recycling measures.

Although the circular economy is very supportive of sustainability, it is not synonymous with sustainability. A sustainable business model must allow for the regeneration of resources and also be consistent with social issues.

circular economy

Why should you adopt a sustainable business model?

There are many reasons to adopt a sustainable business model. Customers demanding sustainability in products, governments imposing regulations to this effect, investors only relying on sustainable business models, long-term risk mitigation are all reasons to introduce a sustainable business model.

However, the biggest reason is to take advantage of the great opportunity that transformation brings. It will enable your organization to create more value for customers, the environment and society. This will be reflected in a very long growth period.

trust

The only reason not to is that it is a change. But with a picture for the future, a narrative and a positive spirit of exploration, you will carry others along and find the support you need.

Sustainable business models create a positive brand image, you build trust with customers and other stakeholders, become a magnet for talent, and generate better profits for your shareholders as well.

What is Greenwashing?

Greenwashing is a term for methods of public relations that aim to give a company a public and responsible image that does not correspond to the real facts. Lack of foundation. When a company falsely claims to have become more sustainable, it is greenwashing. It is not enough to change just one aspect in procedures and practices if the entire impact is not considered.

green washing

For example, using renewable energy in an otherwise resource-intensive business model such as paper manufacturing may be beneficial, but it does not change the resource consumption.

Are there examples of sustainable business models?

In the literature you will find whole libraries of patterns observed in practice. They can be located in a triangle (economic, environmental and social).

They rely on patterns such as pricing, financing, ecological design, material cycles, supply chain management, service, cooperation, communities, donations and granting access.

Below are some examples of more sustainable business models. This is not to say that the organizations mentioned are fully sustainable. However, the principles and opportunities for growth are evident in these examples.

Example: AirBnB operates a platform for arranging accommodations. By using accommodations that would otherwise remain vacant, it makes better use of existing resources (assuming it doesn't leave an equal number of hotel rooms vacant). In addition, the platform brings people more together who might not otherwise meet.

Example: Hilti rents out durable construction equipment instead of selling it exclusively. This increases the degree of utilization of the existing machines. Hilti guarantees operation by providing a 24h replacement service in case a machine breaks down. This takes away worries and fears from construction workers. Construction companies don't have to master machine logistics for different job sites. If they need more machines, Hilti provides them. Hilti pools the needs of many construction companies and can thus generate the same benefits for customers with a smaller machine fleet overall.

How to get to a sustainable business model.

Sustainability is moving more and more into focus. Both in the media and among companies. Through the reporting grows the attention for the topic*. Customers are increasingly asking about origin, the carbon footprint or ingredients. They want to make a contribution to sustainability and use natural resources sparingly for the sake of future generations.

Legislators are also increasingly demanding clarity and openness, as in the example of the Due Diligence Act.

Competition has not left companies with many options in recent decades to procure raw materials, prematerials and products from around the world. On the one hand, this has increased prosperity in many countries. On the other hand, however, it has also led to dependencies over which companies do not have full control because they usually do not know their suppliers' upstream suppliers or when natural forces cause supply shortages. It is unclear how political currents in the world will develop and how data will be handled. All of this has a impact on the performance of your value chain.

The population in the world has grown and continues to grow. People have a right to prosperity, which is reflected in the increasing demand for energy and goods.

All of this shows up in companies. They are gathering new data, conducting audits of your suppliers and your operations, introducing new metrics.

But this has inadvertently led to an overemphasis on reporting and compliance per se, and less attention to strategy, measures, and value generation. ESG metrics dominate the discussion rather than capturing real progress toward a sustainable business model.

A second problem is the disconnect between strategy and sustainability considerations. Reporting on sustainability is often decoupled from financial reporting and does not measure the value of the business.

Materiality metrics attempt to address this problem by locating the critical issues for individual companies or industries. However, they are too narrow in scope. Problems often arise across industries and require action by multiple participants in ecosystems. The problems can only be eliminated through collaboration, standards, and common goals. The search for a new business model must therefore encompass ecosystems and have a wider scope than in the past.

On the other hand, customers are increasingly making purchasing decisions based on sustainability criteria, perhaps without wanting to pay for improved sustainability.

Therefore, the question you face is how to change the entire value chain so that you are also successful with sustainable products. The changes that become necessary reach deep into the DNA of your organization.

Sustainability is increasingly transforming from a cost driver to a value driver if you recognize and seize the opportunities.

opportunities

Look at how your organization deals with the topic of sustainability: On which side would you classify your organization?

Cost Drivers Value Drivers
Focus on compliance, protection, cost savings Focus on value and opportunities
Limited investment in people and initiatives Using sustainability to create value and solve current and future needs of customers
Sustainability not embedded in core strategy Strong awareness of sustainability, context, value for business development
No vision shared with customers and stakeholders Increased investment in people and initiatives
More likely that competitors will be quicker to seize opportunities Longer-term goals
Sustainability issues are underrepresented in risk management Increased likelihood of managing risks related to sustainability
"Business as usual" instead of active search for new business opportunities Sustainability is a clear incentive for investors
Sustainability is only a weak incentive for investors

The opportunity for organizations is to see sustainability as a growth driver. The issue is not going away. If your organization approaches it half-heartedly and doesn't explore the opportunities, there will be a shift in market forces for the foreseeable future.

Below are five steps that will lead you to a sustainable business model. Don't think of these steps as a one-time process. It is something you will run repeatedly. In particular, you will continuously go through steps 2-5.

Step 1: Develop a narrative.

To start, see if you can come up with a strategic narrative for your organization. You need something that is gripping, easy to understand, and at the same time a motivator for employees and customers.

You can derive it by taking the foundational idea of the company. With this, you can more easily see the great opportunities that come from an expanded context, unmet needs and desires. What is the purpose of your organization? What do customers want? How can you come to a shared vision where everyone plays their part in their role?

narrative

The narrative is something you can use to gauge ideas and progress toward sustainability.

Step 2: Map the organization and the extended environment.

How can you get started? The approach described in textbooks is to set up a materiality matrix.

Materiality assessments are key to charting the environmental, social and governance (ESG) issues that affect your company and its stakeholders. Not all ESG issues affect every company. A materiality assessment is the process of identifying the relevant issues and deciding how important they are to an organization. Materiality assessments or matrices that include future opportunities are emerging as an important ESG assessment and risk management tool.

For the materiality matrix, list the issues that are important to you and your stakeholders and rank the importance of the issues according to their relevance to stakeholders and your own organization. When you plot the two dimensions against each other, you get the materiality matrix. From the matrix, you can easily identify topics that are of particular importance to everyone. It forms the foundation for further actions, for deriving goals, initiatives and processes, for reporting and communication.

materiality matrix

Only how do you get to the issues? Is it enough to go into discussion with the current stakeholders?

We recommend that the outlined view and the environment be very broad.

1: You need a comprehensive understanding of the ecosystems of your stakeholders, the environmental and societal issues and trends that may have an impact on the overall ecosystem. You need to understand the dynamics that could emerge and how they impact your own business model or the business model of your value creation partners, directly or indirectly.

2: With the understanding you have gained, you can now evaluate the influence of different trends and dynamics. Where do they create vulnerabilities for your business model? Where do these constrain your business model? What would be the worst case scenario?

3: Draft scenarios for the issues you included for the materiality matrix. For a good scenario-based materiality assessment, pick the topics that meet the following criteria:

  • They are plausible and realistic.

  • They are relevant to the company's internal and/or external stakeholders.

  • There is a significant chance that the scenarios could occur in a relevant timeframe.

Once the scenarios have been selected, consider how their key issues might evolve in terms of significance, risks, opportunities, and impacts now and in the future.

Additionally, create scenarios to imagine completely different, more extreme versions of the future. You can do this if you try to move away from linear extrapolations and also allow for exponential dynamics.

For example, even though epidemics due to a virus have occurred in the past, the scale that the pandemic will have with Covid has hardly been considered by anyone.

What if investors and consumers want to influence on a large scale? What if new and more stringent regulatory requirements are introduced in the countries where your company operates? What if you need to make your supply chain fully transparent or could be held accountable for sustainability even with your suppliers' suppliers or your customers? What if you can only get money from the capital market if you can meet very high requirements? What if you can charge a significant premium for your products?

Under these scenarios, you screen possible future developments: How might environmental and social issues change over time? How might stakeholders' perceptions and attitudes about these issues change? What would be the impact on your ecosystem and that of your value creation partners and business model?

4: Examine the viability of your organization if it were to downsize or upsize. What would be the reduction in sales, unit sales? What would be the stress points? What if you grow very significantly? In that case, where are the limitations? What are the weak points? What impact do these cases have on your environment?

scaling

5: With the preceding considerations, you will be able to identify important critical points to pay attention to. These are points where small fluctuations will result in dynamic changes for your business model and for your stakeholders.

6: In the last part of the this step, you outline the materiality matrix. You will have an overview and a communication tool. You can refer to underlying dependencies and the critical issues that are relevant to the topics.

Step 3: Explore options.

Now that you have sketched the landscape and materiality matrix and know the dependencies, you also know where the opportunities for financial returns and societal or environmental benefits are greatest.

Now the question is how do you best exploit these opportunities? In this step, you develop the innovations for your existing or completely new business models. In doing so, you circumnavigate the weak points of the existing business model, exploit trends and technological progress, and integrate environmental and societal benefits.

The development options are many and varied. It is hopeless to provide a complete overview.

In principle, it is about multiple ecological and social aspects. Ecological measures ultimately lead to a reduction or avoidance of the extraction of new raw materials, the prevention of pollution of soil, air and water, reduced land use and the preservation of biodiversity. Social measures include issues such as preserving health, respecting human rights, improving education, social cohesion, working conditions, and also sharing or financing products or facilities.

In addition to the use of new, more efficient technologies, you will find some starting points for the search for ideas in:

  • Circle: Close product loops. This allows you to control and reduce the use of raw materials. There are countless possibilities here that contribute to the reuse, extension of useful life and utilization efficiency of raw materials, components, products or machines. You achieve environmental and social impact.
  • Extend your value chains both supplier-side and customer-side. This gives you more influence and allows you to help shape ecosystems.
  • Reduce transport distances to reduce energy use. You can achieve this through regionalization or re-localization.
  • Create additional social value with your products, e.g. through complementary products. This way you increase loyalty and are rewarded with a higher willingness to pay.
  • Create a more sustainable image through transparency . This point meshes with the narrative already mentioned. Be the pioneer in your industry and set new standards.
  • Create partnerships across sectors. The nature of collaboration between government, nonprofit, and private organizations varies regionally. Take advantage of the opportunities this presents.
  • Design products to shift consumers' behavioral patterns toward sustainability. You could do this, for example, through rental and service offerings.
  • New mixed forms of financing could help increase your own investments while minimizing risks.

You can use these points as a starting point. You can adapt them to your situation or make them relevant by combining them. Look at what patterns you see in other industries or countries. Innovation comes from copying and adapting.

industries

Another source of ideas is causes of environmental and societal challenges. Look and ask the question "why" several times. This will get you to the root problem. Can you help solve this?

Step 4: Select options, test

To select the right options for the business model, you can use two benchmarks. One is whether it creates more environmental or social value compared to the existing model. The other benchmark is whether it strengthens differentiation and could be weakened by others.

Here are some questions about value:

  • Can the business model scale without negatively impacting profitability?
  • Do you achieve more control over pricing?
  • Does the business model create value for your ecosystem partners?
  • Does the business model create environmental or social benefits?
  • Are there amplifying network effects? Do customers attract more customers?
  • Is the business model more robust to trends and influences than the existing one?
  • Does the business model strengthen your organization's purpose and brand?
  • Does the model create a higher return for your investors or shareholders through environmental or social benefits?

And Differentiation/Uniqueness:

  • Will the business model differentiate your brand or product and make it more competitive in the marketplace?
  • Does the business model build on insights, data or unique capabilities that only your organization has?
  • Does it reduce the risk of commercialization by making it difficult for others to imitate?
  • Are there strong reasons why the business model cannot be leveraged by the competition?
  • Does it rely on network effects?

Step 5: Roll out the business model

Even though the previous steps have taken some effort, this step can be the real challenge. Often when organizations make changes, antibodies are activated. However, this is where the narrative, vision and general trend towards sustainability comes to the rescue.

You will need to involve a lot of people in your organization, throughout the supply chain and in your ecosystem. It's good if you've already done this with Step 1 and openly collected ideas from everyone. Involving all stakeholders will allow you to scale impact and benefits.

When it comes to implementation, there are three key amplifiers:

  • Digital technologies can help you open up new customer channels, communicate and connect with partners
  • Through partnerships with other organizations in your ecosystem, you may be able to join forces or find missing knowledge and skills.
  • Open communication and inclusion fosters a new culture and reinforces values for a sustainable future. This helps to engage people, reduce fears and gain more implementation power.

Outlook

Even though a lot of things will be new and you will need to develop a lot of imagination to paint a new picture for the business model, it is worth it. Employees, suppliers, stakeholders and your children will thank you for taking a bold step toward sustainability.

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