Business model innovation: Making the leap in sustainable value creation

To meet the environmental and social challenges the world currently faces, innovation needs to go beyond just products and technologies: we need new business models.

New business models create breakthroughs in the scale and speed at which we can transition to a sustainable economy. By creating, delivering and capturing value in new and better ways, they can rapidly transform whole value chains for the better, changing the behaviour and attitudes of competitors, suppliers, partners and customers.

We are already seeing a lot of progress in remanufacturing and other models that extend the lifetime of products. Caterpillar's 'Cat Reman' brand is an established example of product remanufacturing at end-of-life, thereby preserving and reusing value. Canon are applying remanufacturing and re-conditioning models for printers and copiers; and Philips are refurbishing medical equipment at end-of-life for resale to new customers. Group SEB, a French household appliances company, are the first manufacturer in their segment committing to repairability of their products for a 10 year period.

Remanufacturing can save up to 80 per cent of ‘embedded' carbon emissions compared to making new products by not requiring significant additional material inputs. Cost structures for remanufacturing and re-conditioning of products can also provide the flexibility to price lower, making products more affordable and expanding markets.

There are also very exciting new service-based models emerging. These occur where companies re-think who their target customer really is, and what value propositions would most effectively meet their requirements. By shifting from selling products to services, companies are able to incentivise resource efficiency, cut waste, and de-couple value creation from resource use.

As an example, Hilti shifted from selling tools to construction workers to providing a service to construction company managers for access to tools-on-demand, with guaranteed performance and quality. Similarly, Mud Jeans leases clothing for a monthly fee, providing customers with the option to either keep their jeans or switch to a new product at the end of the lease period.

For many industries collaboration is an important element in unlocking new, more sustainable and more competitive business models. Inditex, parent company of retailers including Zara and Massimo Dutti, is partnering with suppliers to create reusable fibres and establishing product take-back channels downstream. BAM Construction is partnering with IBM and construction product suppliers to enable materials within buildings to be tracked and re-used at end of life.

Because creating new value goes beyond the financial, benefitting society and the environment, this can make a significant difference to a company's license to operate. Demonstrating social benefit can reinforce the foundations for future success. Conversely, if you are a laggard in this respect, it can hamper growth and competitiveness. Importantly, companies need to have a clear perspective on how new business models create value for customers - this is a basic requirement to ensure viability.

A systematic approach to business model innovation

The core concept of the circular economy provides useful framework for designing radical resource efficiency into systems. But in order for this to be successful, it requires simultaneous changes to existing business models.

Through work done by the Carbon Trust and partners as part of the EU-funded R2Pi project on circular economy, we have identified seven archetype business models and underlying mechanics that enable success. These are illustrated below. Importantly, they do not only work in isolation - combining two or more of these patterns can magnify the scale of value creation and resource efficiency achieved.

Business model patterns for the circular economy

Going through the process of business model innovation - whether at an established company or a start-up - is inherently messy and fluid. Nevertheless, structured approaches can be applied in order to plan for success. These borrow and adapt tried-and-tested methods and toolkits, which are already used successfully in many fields, to drive innovation and scale-up new business models.

These approaches help organisations embrace uncertainty, at the same time as enabling new ideas to be effectively generated and tested. Having a clear and focused framework reduces the risk of placing the wrong bet, or investing too much too soon.

Broadly speaking, the business model innovation process is iterative, cycling through the following steps and feeding in new insights into areas such as customer behaviour, market opportunity, revenue models, and cost structures.

1. Understand: organisations need a clear picture of how their current business model creates, delivers and captures value, as well as its relative strengths and weaknesses. This needs to be seen in the light of key dynamics and trends within the wider business environment, assessing whether these are opportunities or threats for their existing business model. Scenario-based assessments of different future pathways will help companies grasp the potential value-at-stake.
2. Innovate: organisations need to create options for potential new business models or value propositions. Importantly, these should just be seen as assumptions until they are properly tested with the market in the next step. Insights from business models used in related industries or other geographies can be helpful as inspiration. For example, profiles and case studies of circular economy business model archetypes are available for this.
3. Validate: through iterative market testing of assumptions, prototype concepts and minimum viable propositions, organisations will learn and decide whether to continue with a planned approach; to pivot their business model; or to start afresh. A key principle is to use continuous and rapid validation loops, getting feedback from the market and customers, rather than theorising inside a room.
4. Implement: going through the previous steps will provide companies with the confidence needed to proceed with the implementation of new business models. This will initially be done through small scale demonstrations and pilots, generating further refinements to key aspects of the business model, creating a solid foundation for scaling up to success.

Throughout the entire process, it is important for organisations to be able to map out and assess the readiness level of their new business model. This can be used as a useful gauge of progress and a way of setting stage-gate decision points for further investment. This applies both when the process is being done internally by established companies, as well when external investors are involved with start-ups and SMEs.

As things stand, within the next decade the global economy will need transform to the meet the needs of a world striving hard to improve the wellbeing of nine billion people. In particular radical action on climate change will precipitate leaps forward in clean energy, improved resource and ecosystem management, and systems for sustainable production and consumption.

Overlaid upon this are multiple technological revolutions on the cusp of causing their own major disruptions - such as the Internet of Things, artificial intelligence and blockchain technology - which will each provide further opportunities to create sustainable value.

Having structured processes in place and dedicating resources towards business model innovation will provide organisations with the means for change. Companies that are ambitious and willing to challenge the status quo have a huge opportunity to be the ultimate winners in a sustainable, low carbon economy.

Aleyn Smith-Gillespie is an Associate Director at the Carbon Trust, where he leads work on the circular economy and business model innovation.

You can contact Aleyn on [email protected] and on Twitter @aleyn.