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Innovating Business Models for Sustainability

Regulation, cost, reputation, revenue and risk management are driving many organizations to cut their carbon emissions, and become more sustainable. More businesses are looking at how they can put environmental sustainability at the heart of their existing business models. A fast-moving consumer goods (FMCG) company, for example, may improve manufacturing processes, minimize (or share) logistics, outsource the provision of physical assets used in manufacturing, reduce packaging, or educate consumers in minimizing the in-use phase (e.g. use of water) and encourage consumers to recycle.

To maintain competitive advantage and mitigate reduced demand from a saturated or simply more tentative market, incremental improvements may not be sufficient, and step changes may be necessary. As increasing resource scarcity becomes a significant issue, and more businesses start to understand the cost savings that can be realized through minimizing resource use, businesses are turning to disruptive innovation for sustainability.

Innovating products, processes and business models can help to deliver revenue streams that are decoupled from a reliance on natural resources. The need for a new approach becomes increasingly critical when one considers the current landscape in which businesses are operating. For example: raw materials and commodity prices are likely to rise in the future; customers increasingly understand the value of accessing physical products and questioning their need to own them; social media is also enabling the development of virtual communities and amplifies customers’ thoughts and opinions to a wider audience than was previously possible.

Against this backdrop, there is the opportunity for forward-looking organizations to develop alternative ways to deliver the value of a product or service, rather than focusing solely on their immediate features and functions. This will result in less traditional retailing of physical products to consumers and a greater focus on developing services and experiences that will lead to longer-term engagement with customers.

There are a number of important concepts that organizations can consider when rethinking the products and services they offer:

Dematerialization involves removing reliance on the physical product altogether – for example, using video conferencing rather than face-to-face meetings, or downloading content to view on e-readers.

Some products are evolving into services through the concept of access over ownership, which involves providing access to a product, and minimizing the “idling time” that occurs when it is not in use, by sharing with others. This is proving a popular model for durable products like cars, bikes, DIY/gardening tools, sports and outdoor equipment, homeware, toys and even handbags. Examples include Peugeot’s Mu service, that lets members hire a range of mobility solutions, including pedal cycles electric cars, and O2’s leasing of Apple iPhones to customers. Alongside products, peer-to-peer “collaborative consumption” models even include access to shared skills and physical spaces.

Product substitution is another approach to a new way of doing business. It offers an alternative way of delivering the equivalent value of a product. An example of this is selling insulation rather than electric heaters.

Samsung is a notable example of a company utilizing upgradeability through their introduction of upgradeable TVs. Some latest models will have a slot able to take an “evolution kit” – these will be available in 2013, with the aim of upgrading TVs to include the functionality of next year’s sets. This extends the life of the TV and ensures access to the latest new features.

Companies such as Le Creuset cast iron cookware and Miele electrical appliances differentiate with lifetime/extended warranties, providing a strong after-sales relationship based around a durable and serviceable product.

New thinking around consumption and resource use is also encouraging debate on a more sustainable attitude to dealing with products when they reach the end of their useful life. For instance the secondary markets model involves securing a second home for a product once its original owner has finished with it. A franchised previously-owned car dealership is a good example of this. Another example is Patagonia, which helps their customers re-sell their outdoor wear.

Organizations can also consider a closed-loop approach, which means taking back products at the end of their life, disassembling/refurbishing components and creating a new, upgraded version. Eco-boxes.co.uk offers a service for the take-back of house removal boxes once customers have finished with them.

Alternatively, if a business could utilize waste streams at the end of a product’s life it could adopt the downcycling model. Nike currently utilizes this model through using old trainers to make sports court surfaces and playgrounds. Conversely, upcycling creates a more aspirational product from waste: Elvis & Kresse turn old fire hoses into luxury bags, and Freitag transforms truck tarpaulins into messenger bags.

The opportunities above may be relevant not only to manufacturers of durable products, but also for other sectors, including retailers, providers of insurance, servicing/repairs, logistics and IT. Collaboration between and within industry sectors, and in the supply chain, can help stimulate innovation. Some organizations even run open innovation platforms designed to enable customers and third-parties to contribute innovative ideas for new sustainable products and services.

Richard Waters is principal of Carbon Trust Advisory, which is experienced in helping businesses benefit from the opportunities of the low-carbon economy. It assists organizations in developing a view of carbon emissions and resource use along the value chain, and in using this information to build a strategy for sustainable growth. Financial and risk modelling techniques also help these organizations understand the business case for delivering sustainable innovation, and build a compelling case for change.

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2 thoughts on “Innovating Business Models for Sustainability

  1. We really are starting to go backwards…where nothing is disposable and everything has a reuse. I esp. like the thought that manufacturers are again building products to last a lifetime, mine, not the products. I still use the same square head screwdriver set my father purchased over 60 years ago…60 years of turning screws and the tips are as square as the day he bought them!

  2. What’s even better is that the stock markets have rewarded companies that implement these kind of resource efficient step changes to their processes and products and have done so for years. But interestingly, the reason is less about sustainability and more about the impact on these forward thinking businesses. They tend to have higher operating margins, higher returns on equity and assets and much better yields on their assets while generally having lower price to book and lower price to earnings. These are the companies of the future.

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