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Our Insights 16 Sep 2013

How Firms Innovate Their Business Models for Sustainability

By Lindsay Clinton

Image: iStockphoto

Historically, most companies advanced their sustainability credentials through reporting, efficiency or even just good marketing. Approaches often involved streamlining processes or products to achieve a smaller environmental footprint.

These innovations are worthwhile and move us closer to sustainable development, but they don’t address the underlying value structure of a company. They are incrementally better, but not transformative or good enough to change our take-make-waste economy.

SustainAbility recently began an analysis of 85 companies and their business models to better understand what innovation in this area looks like. We plan to release a full report this fall with all of our findings, but wanted to share early results and a few common trends that have emerged.

Business model innovation, for example, is more likely to occur at smaller companies. A focus on consumer consumption also is making an impact on corporate business models as firms find ways to create value without using more resources.

Defining the parameters

To perform our analysis, we consulted recent reports, news articles and blogs on business model innovation and sustainability to identify and study companies cited for their forward-thinking approaches. We categorized these innovations according to industry type, company size, geography, sustainability intent and type of innovation. We then analyzed each example, and for those companies that had changed an existing business model or launched a new one, we identified patterns in the particular types of models, including dematerialization, alternative marketplace or social capital.

From the outset, SustainAbility decided to develop its own way of defining business model innovation because all too often, innovations in process and product are often mistaken for business model innovation.

We settled on this: a novel form of exchange at some point along a company’s value chain.

The most straightforward type of exchange happens between a company and its customers, such as when a customer purchases a product. But increasingly, we see valuable, transformative exchanges between a company and its suppliers, such as when local produce sourcing gives suppliers more income and customers lower prices, or between a company and its employees, which can be illustrated through cooperative models.

We surmised that transformative changes in certain processes or ownership structures amount to business model innovations when they affect a different — at times, more equitable — kind of transaction in the value chain.

The terminology around business model innovation and sustainability is also important and necessary to parse. “Business model innovation for sustainability” is the creation of novel forms of exchange at some point along a company’s value chain that enable a business to respect environmental limits while fulfilling social wants and needs. Plenty of business model innovation is happening in the world — Apple’s iPod is often cited — but it’s harder to find examples that do so while advancing a sustainability agenda.

Early findings

Using these definitions, we winnowed our list of 85 innovation examples down to 50, and then to several dozen. Several patterns emerged.

1. It pays to be small

Although we found large companies demonstrate business model innovation for sustainability, the majority of business model innovations occurred at small and medium-sized companies with less than 1,000 employees. When innovations happen at multi-national companies, they often occur within a particular arm of the company focused on a single market, such as Novartis’ Arogya Parivar health care model (PDF), which focused on poor communities in India. It is rare for a global market leader to transform its entire business model for sustainability.

2. Transforming an existing model is less common than innovating from scratch

We see far fewer examples of business model innovation at companies with existing, profitable models. This is likely due to the complexity of transforming a working business model and the vested interests in the current model. Far more often, we observe startups that create business models for sustainability as their foundation, such as SunEdison, the solar energy products and services company. The underlying reason is simple: It’s far easier to build a more sustainable structure brick by brick, rather than retroactively retooling a business’ underlying framework.

3. Changing consumption habits is increasingly prevalent

With the spread of the circular economy concept and the explosion of ““sharing economy(”:” businesses, we identified many examples where a consumer’s impetus to reduce and change consumption patterns is based on other consumers’ habits, as demonstrated through firms that include Common Threads and OPower. These models find ways to generate business value without using more resources to create more stuff.

4. Companies are using technology to allow for market intermediation

We observed many models that use technologies such as online platforms, cell phones and data kiosks. These technology platforms invite business model innovation. They enable businesses to cut out middlemen (ITC e-Choupal), create new currencies, such as M-Pesa cell phone minutes, and tap into new value, illustrated by how GM’s OnStar technology enables car owners to transform their vehicle into a revenue generator through RelayRides.

5. Innovative financing is fast-tracking green energy solutions

A surfeit of examples employ innovative financing methods to support the uptake of green energy solutions, including Mosaic, Simpa Networks and Solar City. Because solar energy products are often expensive or perceived as risky, many solar businesses have created models that enable customers to buy their products over time, lease or invest as a community or consortium.

6. Innovation is happening everywhere

We assumed that most of the business model innovations we identified would originate in the developing world because of the high incidence of creative social enterprises, the subsidiaries proliferating in emerging economies — think M-Pesa and ITC e-Choupal — and the freedom of multinationals to innovate for new customer segments in these markets. However, the examples that emerged from our desk research were geographically diverse. It is clear that innovation for sustainability can happen anywhere and is not dependent on frontier marketplaces.

Stay tuned for for more on our ongoing research. We look forward to sharing and discussing this project in more depth this fall.

(Originally published on SustainAbility’s “What’s Next” column on GreenBiz.)

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