Business Model Innovation

“If you don’t understand innovation, you don’t understand business”

— Peter Drucker [1]


MIT’s Sloane Business Review and the Boston Consulting Group conduct an annual survey of business leaders on Sustainability and Innovation. The results for the 2012 survey were recently published [2]. The results are based on about 2,600 responses from managers and leaders in commercial organizations around the world.


There is a lot of useful information in the report — it is well worth downloading, reading and thinking about. This post will focus on three major points: 


Capture - Business Model Innovation chart 1Question
>> Is pursuing Sustainability – related strategies necessary to be competitive?


Yes: 60%, No, but will be in the future: 31%, No: 5%, Don’t know: 3%


Conclusion
>> The overwhelming response is that Sustainability is necessary in order to be competitive now, and Sustainability will become increasingly important in the future.


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Capture - Business Model Innovation chart 2Question
>> Has your organizational commitment to Sustainability — in terms of management attention and investment — increased substantially in the past year?


Increased: 63%, No change: 29%, Decreased: 3%, Don’t know: 5%


Significantly, when the same question is rephrased to reflect expectations for next year, the results become:


Will Increase: 70%, No Change: 24%, Will Decrease: 2%, Don’t know: 4%


Conclusion
>> A substantial majority of responding organizations increased their commitment to Sustainability last year, and even more organizations expect to increase next year (i.e. in 2013).


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Capture - Business Model Innovation chart 3Question
>> Has your organization’s business model changed as a result of Sustainability?


Yes:  48%, No: 42%, Don’t know: 10%


Conclusion
>> “Nearly 50% of companies have changed their business models as as a result of Sustainability opportunities – a 20% jump over last year.”  This emphasis on business model innovation led the authors of the survey to conclude that “business model innovation is the crux of Sustainability profits.”

Business Model


The term “business model” has become a commonplace in MBA – speak. In essence, a business model consists of a Value Proposition and an Operating Model. The Value Proposition consists of that collection of tangible and intangible features and benefits that induce customers to select your offering over competitive offerings. The Operating Model consists of that set of processes, policies, practices and procedures that allow you to deliver the value offered, while generating a satisfactory profit by doing so.


The Value Proposition and the Operating Model can each be reduced to a number of elements. The survey mentioned above includes a rather rudimentary list of these elements. An informative Harvard Business Review article by innovation guru Clayton Christensen, et al goes into more detail [3]


Business Model Innovation


Sustainability and its business effects can disrupt existing Business Models, as well as provide new opportunities. Where a Business Model is disrupted such that it no longer generates a satisfactory profit, it needs to be reinvented. Where new opportunities arise, suitable Business Models need to be created in order to seize those opportunities. The Harvard Business Review article previously mentioned provides insights as to how this can be done.


Here are two examples of innovative business models that respond to opportunities produced by Sustainability:


Waste Management Corporation
>> Waste Management, the folks with the green trucks that collect your trash, have really expanded their Business Model to capture new opportunities. Their old model was to charge customers to collect their trash and carry it to the landfill. Today, they still charge customers to collect their waste. However, more and more of that waste is sorted, reclaimed, reprocessed as needed and sold as raw materials. Today, Waste Management profits from specialized facilities to reprocess hazardous wastes and from facilities that convert organic wastes to salable compost. They even profit from collecting and selling the methane gas generated in landfills — WM generates more Green electricity from doing this than does the entire U.S. solar energy industry! 


Solar City
>> Reports of massive losses in the solar energy field — particularly in solar cells and collection panels — have been frequent over the last year or so, as global capacity increased faster than market demand. Elon Musk — the man behind Tesla Motors, the electric automobile manufacturer, and Space X, the company whose rockets are resupplying the International Space Station — has a different Business Model for solar power: Solar City.


Solar City doesn’t sell solar cells or panels. Instead, Solar City acts as a supplier of electricity to residences and other structures. Solar City contracts with building owners to provide power. Solar City provides, installs, owns and maintains the solar panels and associated equipment. The building owner pays a pre-defined monthly payment to Solar City for the first “X” number of kilowatt hours used in each month. The local power utility provides and bills the building owner for any net power usage over “X”. (“Net” = solar power generated in excess of the building’s current usage rate is purchased by the local power utility). Since electric power utilities usually have tiered pricing structures (like income tax rates — the more power you use in a month, the higher marginal price per kilowatt-hour you pay).


The building owner has no capital investment or construction cost. The bulk of the building owner’s power costs are at a fixed or nearly fixed long – term price, future fuel costs or inflation rates notwithstanding. Solar City handles all engineering, construction and maintenance hassles.


The local power utility gets high quality peak hour Green power at a bargain price, with no capital investment on their part.


Solar City sells a bundled system on a long-term contract. They buy solar panels and other gear in volume and factor the cost into the building owner’s monthly bill. The building owner, the power utility and Solar City all get a good deal.


What Next?


The MIT survey indicates that: (a) Sustainability is critical to competitiveness now, and will be increasingly so in the future; (b) a substantial majority of the firms surveyed increased their commitment to Sustainability in 2012 and even more expect to do so in 2013; and (c) Business Model Innovation is a key tool for addressing the threats and opportunities that Sustainability presents.


One approach to becoming more familiar with your existing business models is to read the Christensen article discussed above, then download a business model “canvas” [4] (i.e. template), enlarge to wall chart size, and fill in the blanks for each element. 


Chuck - Blue Sweater 2Thoughtful comments and experience reports are always appreciated.


…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)


P.S
: Contact me when your organization is serious about pursuing Sustainability … CH


This blog and associated website (
www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


 

[1] Edersham, Elizabeth, The Definitive Drucker, McGraw-Hill, New York (2007), page 84.

[2] MIT Sloane Management Review Research Report, The Innovation Bottom Line, Winter 2013. Available for download at: http://sloanreview.mit.edu/reports/sustainability-innovation/

[3] Johnson, Mark, Clayton Christensen and Henning Kagermann, Reinventing Your Business Model, Harvard Business Review, December 2008. Reprint R0812C, available for download at: http://hbr.org/search/R0812C/0?refinement=4294841677