Sveinung Jørgensen | Lars Jacob Tynes Pedersen
Responsible and Profitable Strategies for sustainable business models
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Copyright © 2015 CAPPELEN DAMM AS. All rights reserved. ISBN: 978-82-02-49097-3 1st edition, 1st print 2015 First published as Ansvarlig og lønnsom, copyright ©2013 CAPPELEN DAMM AS. The work for the original book was funded in part by the Center for Service Innovation (CSI) at the Norwegian School of Economics (NHH) and Centre for Innovation in Services (CIS) at Lillehammer University College. The publication of the original book was funded in part by The Norwegian Ministry of Education and Research, represented by Lærebokutvalget for høyere utdanning. Cover design: Karine Pedersen | Arktisk design Typesetting: Laboremus Oslo AS Translated by Steven Connolley Printing and binding: Livonia Print SIA, Latvia 2015
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[start ded]
To Endre and Rannei Johanne Marie and Ada
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Preface to the international edition This book addresses the question of how to align responsibility and profitability in business organizations by designing and implementing sustainable business models. It is based on our joint research on responsibility and sustainability in business over the last decade, and has been developed as part of the Smart and Sustainable Business Models research project at the Center for Service Innovation at NHH Norwegian School of Economics. The book comprises numerous cases and practical examples from companies – many of which are Scandinavian, some of which are international. Its aim is to shed light on how these companies manage to move towards more sustainable business models. The book is an English translation of Ansvarlig og lønnsom: Strategier for ansvarlige forretningsmodeller, which was published in Norwegian by Cappelen Damm Akademisk in 2013. After the publication of the Norwegian edition, the need for an English version of the book became evident. Through seminars, meetings, conversations, presentations and other forms of interaction with international collaborators and an international audience – researchers, companies, business practitioners, students and others – we increasingly experienced an interest for a translation of the book. We are therefore very happy to have the international edition ready only two years after the initial publication of the Norwegian edition. We are grateful to the Center for Ethics and the Economy at NHH Norwegian School of Economics for supporting the financing of the translation. The book is a direct translation, which implies that we have not altered the substance of the book from the original text. An important exception is that while the Norwegian edition used the concept of responsible business models (“ansvarlige forretningsmodeller”) in the subtitle and throughout the book, this edition uses the concept of sustainable business models. Both the concept and its definition have been updated for the international edition. The book interchangeably discusses issues of responsibility and of sustainability, but we have chosen to rename 7
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our central business model concept in this way. In Chapter 1, we discuss how we view the relationship between sustainability and responsibility. The book was translated by Steven Connolley. We are indebted to the translator for his dedicated and proficient work in preparing the international edition based on the original Norwegian manuscript. As always, Wegard Kyoo Bergli, Erlend Aas Gulbrandsen and Tor Paulson at Cappelen Damm Akademisk did a marvelous job throughout the publication process. For all other acknowledgments of our many invaluable helpers, we refer to the Acknowledgements section. We look forward to continuing the conversation on how to align responsibility and profitability through sustainable business models. Please join the conversation on Twitter (@HvaErProblemet), Facebook (www.facebook.com/ HvaErProblemet) and our website www.JorgensenPedersen.no. Lillehammer/Bergen, July 2015 Sveinung Jørgensen Lars Jacob Tynes Pedersen
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Contents – PART 1 – WHAT IS A SUSTAINABLE BUSINESS MODEL? 1
Creating sustainable business models 17
– PART 2 – HOW TO DESIGN A SUSTAINABLE BUSINESS MODEL? 3
Responsible and profitable 21
Business models: How companies create, deliver, and capture value 65
Strategies for sustainable business models 24
An overview of the business model 67
‘What’s the problem?’ as an approach to responsibility and profitability 29
Creating value: Finding the right ‘job’ for products and services 70
Interface: A sustainable business-model innovation 32
Delivering value: The resources and activities that take the value proposition to the customers 72
What’s the problem with responsibility and profitability? 34 The structure of the book 36
Capturing value: The logic to ensure that income is higher than costs 77
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Examples of business models and the connections between them 82
The book’s building blocks: Business models and corporate responsibility 39
The business model: The story of how the company works 41 The book’s approach to business models 43 TOMS Shoes in a business-model perspective 45 Business-model innovation: Reinvent yourself before others do! 48 Corporate responsibility: The business’s ‘sunny side’ and ‘shadowy side’ 50 The core of the struggle: Two different perspectives on corporate responsibility 54 From CSR to CSV: Capitalism’s salvation or the emperor’s new clothes? 55
Business-model innovations in the book industry: Making history rather than becoming history 85 Even non-profit and public organizations have business models 87
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Corporate Responsibility: Why? How? And so what? 91
Corporate responsibility and corporate performance 93 Corporate responsibility as an organizational phenomenon: Towards three relevant dimensions 95 Motivation: Why do companies invest in responsibility? 96 Integration: How do companies take responsibility? 100
Different approaches to responsibility: A two‑dimensional illustration 58
Effect: What is the profitability-effect of corporate responsibility? 103
Notes 61
The responsibility cube: A three-dimensional model of approaches to corporate responsibility 108
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From the business model and corporate responsibility to sustainable business models 117
Value reorientation 181 Sustainable business-model innovations as value reorientation 184
Sustainable business models 119
How to lead and manage a value reorientation 187
An overarching framework for responsible value creation, value delivery, and value capture 123
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Different possibilities and challenges in value chains, value networks, and value shops 127
Organizing for responsibility 193
Towards sustainable business models: Some prominent patterns in practice 131
Decision rights and organizational structure 197
Comprehensive responsibility-inducement 132 Partial responsibility-inducement 133 Facilitative responsibility-inducement 134
How to organize for sustainable business models? 191
Organizing as a strategic resource 195 Role titles and organizational roles 199 Boundary spanners and conversations with external stakeholders 202
Service-dominant responsibility-inducement 136
Measurement and control: Expertise and systems 205
Variations of a pattern: Sustainable business models within the main types 138
Reorganizing for sustainable business models 211
Summary 142
Incentives 208
Notes 213
Notes 143
– PART 3 – HOW TO IMPLEMENT A SUSTAINABLE BUSINESS MODEL? 6
Sustainable business modeling as strategic reformulation 147
Strategy is the solution – but what's the problem? 150
– PART 4 – CONCLUSION 9
A framework for sustainable business models 217
An overall framework 219 From business models and corporate responsibility to sustainable business models 221
Strategic reformulation of the problem of responsibility 154
Shedding light and reducing shadows through the business model 225
Strategy pictures: A practical framework for strategic reformulation 156
Conclusion 230
Strategy pictures and sustainable business-model innovations 161
Implementation of sustainable business models 227
Notes 231
TOMS Shoes: A paradoxical winner 163 Cermaq: Better performance through stakeholder dialogue, measurement and sustainability reporting 166
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Leading and managing sustainable business-model innovations 173
Leadership and management control for responsibility and profitability 177
References 232 Acknowledgements 243 Appendix: One-for-one becomes more than two 245 Index 247
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Foreword This is a book about sustainable business models – why they are needed, what their characteristics are, how they can be designed, and how they can be implemented into businesses and other organizations. In the book we address the relationship between responsibility and profitability in a business-model perspective. This involves our looking at the company’s attending to social and environmental values as a part of the way it creates, delivers, and captures value. Consequently, we integrate the discussion on corporate social responsibility in a business-economic understanding of organizations. We do so to show how companies can create positive effects by building social and environmental objectives into their business model and to show how they can mitigate the negative effects that arise as a result of the firm’s business activities. We also claim that taking responsibility for one’s impact on the environment does not necessarily go against making the firm more competitive because responsibility can lead to completely new business opportunities. This book’s subject is the relationship between responsibility and profitability. We live in a time when the relevance of these topics hardly requires justification. For a long time responsibility has been a ‘niche’ field of study, which was often tied to either philanthropy or reputation-building. The current discussion on responsibility and sustainability is a natural part of the business and socio-economic debate, not least because of the financial and climate crises. In addition, the relationship to responsibility is to a greater degree the object of legislation, regulation, and guidelines, and thus has a more central place in companies’ consciousness. Companies have also opened their eyes to business opportunities that result from taking care of issues of sustainability and other issues that are important to the firm’s stakeholders. Responsibility and profitability are thus of great relevance from economic, societal and environmental perspectives. Striking developmental trends indicate that companies that are able to combine responsibility and profitability can be the winners of the future. Both profitability and corporate responsibility are thoroughly discussed in the existing research and practical-oriented literature. With this book, we try to 11
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develop this knowledge further because we believe that there is a need to build a bridge between these two areas of knowledge. On the one hand, there are the insights from the design and implementation of business models – that is, organizational designs for the creation, delivering, and capturing of value; on the other, there is the knowledge of corporate responsibility – that is, organizational designs for social and environmental goal-attainment. By constructing a business-model perspective on the relationship between responsibility and profitability, we aim to illuminate specific approaches to how responsibility can be integrated into companies’ business models. It should be stressed that this is a book neither about corporate responsibility nor about business models. There is a wide range of books dedicated to each of these topics that explore their various aspects in detail. With this book we attempt to build a bridge between these traditions in the literature. As a result this limits the degree to which we can cover all of the sub-topics connected to both business models and corporate responsibility. Therefore, we will focus on the intersection between these two phenomena. We consider this book to be a relatively optimistic work. By this we mean that the book is mainly oriented towards researching the possibilities for aligning responsibility and profitability, rather than showing how these two objectives can be on a collision course with each other. As researchers within corporate responsibility and business ethics, we are used to working with ‘bad cases’, but in this book we try to do the opposite: we have studied businesses that have been able to combine responsibility and profitability. In this way we discuss relevant characteristics of these organizational designs that can form the foundation for the designing and implementation of sustainable business-model innovations. We should also point out that we do not regard the companies that we discuss in this book as ‘saints’. It is well known that today’s heroes can be tomorrow’s villains (the scandalous enterprise Enron was praised for its work with ethical guidelines), and it is not our intention to paint a glossy picture of the companies we discuss in this book. Instead, we have presented businesses that we believe have taken appropriate steps for moving themselves in the direction of responsibility and sustainability while also succeeding in being profitable. We have gathered a multitude of material from both primary and secondary data on the businesses discussed in this book, and the descriptions and discussions of the examples are based on these data. The forms of the chapters are not, however, case studies as they normally appear in scientific journals. Still, we have sought to analyze the examples in order to illustrate and discuss theoretical points and to show the relevant developmental characteristics in business life at the present time. 12
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The theme of this book – sustainable business models – is a moving target, and the possibilities for how such business models can appear are always changing. We regard, then, the descriptions that are given and the conclusions that are drawn in this book as an academic snapshot of business models that promote responsible and profitable business activities. Our purpose is not, however, to provide a current static picture for its own sake, but to present our still frames so that they can help to create fertile ground for sustainable business-model innovations in the time to come. Please share your sustainable business models with us at www.JorgensenPedersen.no.
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– PART 1 – WHAT IS A SUSTAINABLE BUSINESS MODEL? A fundamental question in this book is: what are sustainable business models and what types of problems can they help to solve? In this part we present to the reader the problem that contemporary businesses face with respect to responsibility and profitability. Furthermore, we present the two theoretical building blocks on which this book is based – business models and corporate responsibility – and we discuss how these are connected to responsibility and profitability. As we proceed we provide practical examples of the design and function of sustainable business models. Finally, we position our perspective on sustainable business models in relation to other relevant literature on responsibility and profitability. With this, we offer the reader a backdrop for our research on how businesses can design and implement sustainable business models.
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– 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 (Inkluderingsprosjektet) 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 addition, 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, 17
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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 questions 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 organization, 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 deep18
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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 considerations of social and environmental limitations. These two objectives are reflected in this book’s title – responsible and profitable – and show the dual goal-structure that most organizations today face. Most organizations, both those that are profit-seeking and those that are not, operate 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 nonprofit 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 constituted the problem. Vålerenga could certainly have laid the blame on the supporters, 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 Fotballforbund, NFF) in order to do something about the problem. In different ways, most organizations – if not all – will experience some negative social and environmental 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 responsibilities 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 inclination to act responsibly. Regardless of the objectives that business managers might have, they are expected to produce financial results in the relatively short term. 19
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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 financial 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 organizations 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 environmental performance.
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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 sustainability 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 profitable Responsibility 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 21
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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 organizations’ 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 antlers, 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. Secondly, 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 specific approach for the integration of responsibility: the business should address 22
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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 responsibility 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 Business 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 business 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 responsibility 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 responsibility 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 companies 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.
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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 ‘sustainability’ is used more frequently in contexts where corporate social responsibility 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 chimera. 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 environment 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 problems 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 models The 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 sustainable 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 24
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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 company’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 combination 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 25
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chapter 1
Figure 1: An overarching model for sustainable business models
Business model
Corporate responsibility
Strategy, leadership and organization
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 combining 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 movements 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 26
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creating sustainable business models
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 goalattainment 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 conducting 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 situation 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
Figure 2: The relationship between responsibility and profitability
+ Y d X Profitable
c b a
– –
Responsible
+
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