The idea of business model innovation—that a company could launch a new business model never conceived of before, or transform an existing business model—has long captivated business leaders. And yet, executives are often held back by vested interests in their current approach: “If it ain’t broke, don’t fix it.” But as global trends—environmental, social, political, technological—continue to shift the foundations of our current business models, incremental innovation will become less effective in enabling companies, industries and whole economies to adapt and succeed. There is an urgent need for fundamentally different approaches to value creation.
The utility industry, for example, is currently confronting a mounting crisis within its existing business model. Changing regulations, rising fossil fuel prices, falling prices of renewables, and the arrival of improved energy storage solutions and other decentralized energy options will completely alter the playing field for large coal and nuclear-powered utilities. These large-scale, centralized systems have been disrupted by the rise of smaller, decentralized energy systems, especially those focused on delivering solar and other forms of alternative energy. While they once captured just a tiny, elite niche of the energy marketplace, companies in this space are now growing rapidly and helping speed the decline of the traditional, vertically integrated utility model. While many utilities are struggling to handle this disruption, some are acting quickly to adapt. RWE, a German utility with over 24 million customers across Europe, plans to shift its traditional utility model and instead use its expertise to help manage and integrate renewables into the grid, switching from being a power seller to a renewable energy enabler, what we would call a product as a service model. RWE is transforming from a “volume to value” business.
The proliferation of such innovation gets to the core of why we’ve written Model Behavior. For all its promise and necessity, advocates of sustainable business model innovation have struggled to get beyond citing a few beloved examples like Zipcar. But examples of sustainability-related business model innovation abound, with new ones arriving almost daily. So we set out to better understand which new business models are emerging, where innovation is happening, and how both new and established companies are experimenting to embed sustainability into the underlying structure of their businesses. The findings shed light on both what’s working and what’s possible.
From our research and review of 87 company examples, Model Behavior identifies 20 distinct business models falling into five categories. Our report offers a closer look at what’s occurring in each of these models to produce more sustainable outcomes. In reviewing these business models, Model Behavior reveals a number of themes relevant to the practice of business model innovation for sustainability:
- Every exchange in a value chain provides opportunities for innovation and impact. We argue that business model innovation for sustainability boils down to creating a novel form of exchange at some point along a company’s value chain. Each exchange that a company engages in—with customers, employees, owners or community—therefore, presents an opportunity for a potential shift in model, and potentially also in social or environmental outcomes.
- Companies that have demonstrated a business model innovation have often done so by shifting incentives in the value chain. By understanding what each stakeholder wants or needs, and responding to that, business model innovations take shape.
- The largest companies tend not to be the source of new models, but they can help evolve and scale them. Most business model innovation emerges from companies that design more sustainable models from the start. Nevertheless, established companies have an important role in helping to bring these models to maturity
- Business model innovation doesn’t happen in a vacuum. We must recognize how any model—sustainable or not—is dependent on surrounding conditions, and that new models are often enabled by, or arise organically from, changes in those conditions. The key is to increase our ability to recognize and respond to—and where necessary, to directly engineer—circumstances that will support new, more sustainable ways of doing business.
If business model innovation is indeed a key ingredient to transforming our economic landscape and improving social and environmental outcomes, it is worth understanding what drives it, what the most promising business models are, what might compel an established company to transform its model before such change is urgent or unavoidable, and what broader systemic shifts—in policy, markets, consumer mindsets, etc.—may most hasten the rise of beneficial new models.
By raising issues and questions for further exploration, and by providing a framework for ongoing discussion, Model Behavior offers inspiration and reflection. It grows out of SustainAbility’s past work on social entrepreneurship and innovation and on the evolving role of the private sector in sustainable development via our 2012 Regeneration Roadmap project and its final report, Changing Tack, and responds to the growing emphasis on systems change and collaboration as key enablers of a sustainable future.
Read Model Behavior: 20 Business Model Innovations for Sustainability or the report’s executive summary.