Business Models for Resource Efficiency - Florian Lüdeke-Freund - Danish Technological Institute 2015

Dr. Florian Lüdeke-Freund
University of Hamburg | Faculty of Business, Economics & Social Sciences
Chair of Capital Markets and Management
www.SustainableBusinessModel.org
Business Models for Resource Efficiency
Danish Technological Institute
Copenhagen, 23 November 2015

A simple form of eco-efficient design (?) *
* Given that computer screens save energy with black instead of white presentations.

www.SustainableBusinessModel.org 3
Eco-efficient design meets business model imitation? Does it work?

Schmidt-Bleek, 2000
The resource efficiency question
How to create useful artefacts that generate as much utility and joy
as possible, using the smallest possible amount of natural resources,
including footprints, for the longest possible period of time?

Boons & Lüdeke-Freund, 2013
The business model question
How to bring resource-efficient innovations to the market in order
to unfold their full potential, in ways that allow users to easily adopt
them and companies to make a business?

Chesbrough, 2010; Hugo Spowers, 2014 (Founder and Chief Engineer of Riversimple, source: www.bbc.com)
Moving to the business model level
“A mediocre technology pursued within a great business model may
be more valuable than a great technology exploited via a mediocre
business model.”
“Disruptive technology can only work if it comes with a new business
model.”

Business Model Basics

A business model describes how an organisation creates, delivers and
captures value based on a particular value proposition.
Business Model
Casadesus-Masanell & Ricart, 2010; Johnson, 2010; Osterwalder & Pigneur, 2009

A business model describes how an organisation creates, delivers and
captures value based on a particular value proposition.
Business Model

Business Model Example
http://www.digitalbusinessmodelguru.com
• “Earth's biggest selection”
of products at lowest price
• “Earth's biggest platform”
for other retailers and sellers
• …
• Large volume sales of hit
items + selling less of more
• Profit sharing with other
retailers and sellers
• Low overhead costs
• …
• Amazon websites and app
• Seller marketplace
• Kindle ecosystem
• Shipping by Amazon, other
retailers, sellers
• …
“Long tail retailer”

Changes to the way an organisation creates, delivers and captures value
based on a particular value proposition.
Business Model Innovation
“Tools on demand”
Sales of tools and accessories
→ Leasing a fleet of tools
Low margins, high inventory turnover
→ Higher margins, asset heavy,
monthly payments
Distribution channels, low cost
manufacturing
→ Direct sales, contract, inventory and
repair management, warehousing
Johnson, 2010

“When significant changes are needed to all … elements of your existing model.”
 Opportunity to address the needs of excluded social groups
through disruptive innovation (e.g. Tata Nano).
 Opportunity to capitalise on new technologies, or bring
tested technologies to new markets (e.g. 3D printing).
 Opportunity to capitalise on unmet customer needs
in terms of price and/or quality (e.g. FedEx fast delivery).
 Need to defend markets against disrupters
(e.g. BMW vs. Tesla).
 Need to respond to shifts in competition
(e.g. high-end service vs. low-cost production).
When Do Companies Engage in Business Model Innovation?
Johnson et al., 2008

Four major categories of drivers for GBMI can be identified
1. Entrepreneurial values – normative orientations such as “doing good”
2. Consumer awareness – expectation of responsible business, green products, increasing
willingness to pay
3. Gain / maintain competitive advantage – differentiate products & services, develop unique
market position, deal with changing market conditions
4. Costs of resources and supply risks – search for alternative inputs, reduce amount of
resources used, source from waste and by-products
5. Regulation – industry-specific laws and regulations force companies to adopt new business
practices
Why Do Companies Engage in Green Business Model Innovation?
Bisgaard et al., 2012

Social business model innovation for the poor: Aravind Eye Care Systems
Business Model Innovation with a Purpose
http://www.aravind.org

Business model innovation for the environment: SunEdison’s PPA model
Business Model Innovation with a Purpose
http://de.slideshare.net/Alex.Osterwalder/a-business-model-for-solar-energy-sunedison-3319168

 St. Gallen “Business Model Navigator”
 55 patterns derived from business history, e.g.
- Auction
- Cross Selling
- Crowdfunding
- Digitalisation
- E-Commerce
- Flatrate
- Franchising
- Freemium
- No Frills
- Peer-to-Peer
- …
Business Model Innovation Patterns

Orientations for Sustainable Business Model Innovation (Examples)
Develop scale-up solutions
- Sustainable solutions at a large scale to maximise benefits for society
- Effects: large-scale replacement of unsustainable solutions
Deliver functionality rather than ownership
- Satisfying user needs without having to own physical products
- Effects: decoupling of profits and production volume
Maximise material and energy efficiency
- Do more with fewer resources, generating less waste, emissions and pollution
- Effects: reduction of waste, emissions, over-capacities
Bocken et al., 2014

Business Cases for Sustainability with Business Model Innovation
Schaltegger & Burritt, 2005; Lüdeke-Freund, 2013
Economic
performance
Social and/or eco-
logical performance
Extended business case
potential through sustainable
business model innovation
ES*
ES0
ESP* ESP1
A
B
CF
E
D
ESP0

Economic
performance
Weak BCfS
WeakBCfS
Strong BCfS
Business Cases for Sustainability with Business Model Innovation
Schaltegger & Burritt, 2005; Lüdeke-Freund, 2013
Social and/or eco-
logical performance
Extended business case
potential through sustainable
business model innovation

 Environmental and social externalities
 Capital intensity and long lead time
 The power of incumbents
Major Barriers to Green Business Model Innovation (General)
Wüstenhagen & Boehnke, 2008
Environmental and
social externalities
Capital intensity and
long lead time
The power of
incumbents
Value proposition
Value delivery
Value capture
E.g. emphasis on
private customer
benefits
E.g. partnerships,
value networks,
outsourcing
E.g. leasing,
contracting, after-sales
services

Major Barriers to Green Business Model Innovation (Examples)
• Customers lack knowledge
about green issues
• Traditional buying habits and
price constraints
• Marketing not able to promote
green products/services
• New materials and machinery
too expensive
• New infrastructures and
partnerships costly to establish
• Employees lack knowledge about
alternative materials etc.
• Suppliers do not understand the
new model
• Marketing not able to promote
green products/services
Bisgaard et al., 2012

Emerging Sustainable Business Model Innovation Tools (Examples)
“Triple-Layered Business
Model Canvas”
“Flourishing Business
Canvas”
“Business Innovation Kit” &
“Sustainability Innovation Pack”
Breuer & Lüdeke-Freund, 2015; Joyce et al., 2015; Upward & Jones, 2015

Business Models for Resource Efficiency

Incentive Models*
(1) Functional Sales (2) Energy Service Company
(3) Chemical Management Service (4) Design, Build, Finance, Operate
*Bisgaard et al., 2012, Green Business Model Innovation

 Customers pay for the result or functionality of a product, and not for the
product itself → broad range of P-S combinations possible
 Provider is incentivised to optimize life cycle cost efficiency, which can
translate into lower life cycle environmental impacts
Functional Sales (a.k.a. Product Service System – PSS)
Example: Philips’ “Pay-per-Lux” model
• Philips recycles existing equipment,
installs efficient lighting,
• Equipment ownership is with Philips
• Customer pays service fee for the light
• Philips pays customer energy bills and
recycling costs at the end of equipment life
Source: http://zwcblog.org/2014/08/08/selling-light-not-light-bulbs/

Range of Product Service Systems (PSS)
Tukker, 2004

 Provider optimises and invests in customers’ energy systems, and earns a
share of saved costs
 Customers pay according to energy consumption and are compensated if
savings are less than guaranteed
 MASCO = material savings / WASCO = water savings
Energy Service Company (ESCo)
Example: Danfoss Power Solutions
• Helps companies in the food and beverage
industry reduce their energy use
• Guarantees their customers energy savings with
amortisation within 2-4 years
• Is paid a percentage of the savings
Source: http://powersolutions.danfoss.com

 Provider is responsible for managing chemicals to fulfill particular task,
e.g. cleaning a metal surface
 Provider and customer have the common goal of reducing chemical costs
 Provider’s profit depends on how well/efficient the function is delivered,
instead of how much chemicals are sold
Chemical Management Services
Example: SAFECHEM
• Provides customers with a complete
solvent cleaning solution
• Does not sell quantities chemical
cleaning products
• Closed-loop system: solvents are
delivered, used, taken back.
Source: http://www.dow.com/safechem/eu/deu/de/solutions/

 Providers undertake large construction projects, bundling financing,
construction and maintenance in one long-term contract
 Long-term contracts incentivise high quality in the construction project, so
that life-cycle costs are lowered
Design, Build, Finance, Operate
Example: ALLFARVEG
• Established for the new road between Lyngdal and
Flekkefjord in Norway
• 25-year contract with the Norwegian Public Roads
Administration
• Receives payment based on the performance of the road
• E.g. use of brighter asphalt, requiring less energy to
light up the road – 30% reduction in electricity costs
Source: http://www.allfarveg.no

Life Cycle Models*
(5) Green Supply Chain Management (6) Take Back Management
(7) Cradle-to-cradle (8) Industrial symbiosis
*Bisgaard et al., 2012, Green Business Model Innovation

 Raw materials are sourced as sustainably as possible, while toxic content is
minimized and eliminated where possible
 Suppliers are pressured to provide products and services that meet
sustainability requirements
 Includes variety of green “3R” strategies (reduce, reuse, recycle) and
codes of conduct for responsible sourcing
Green Supply Chain Management
Example: IKEA IWAY
• Code of conduct for purchasing products, materials
and services, introduced in 2000
• Systemises/formalises social and environmental
standards for suppliers within the supply chain
• Addresses e.g. child labour, minimal wages,
reduction of air, water and soil pollution
http://www.ikea.com/ms/en_GB/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf

 Producers accept extended product responsibility and recover used products,
surplus materials and waste from distributors and customers
 Together with product designers, supply chain managers establish systems to
recover this “feedstock” and reduce production costs
 Crucial is to encourage distributors, customers and end users to engage in take
back systems
Take Back Management
Example: Desso’s Take Back Programme
• Offers taking back customers’ used carpets, both their own
brand and those of competitors
• Desso recycles and recovers raw materials from used carpets
• A broad range of carpet tiles contain 100%-recycled yarn
• Market share and profitability have increased
http://www.desso.fr/globalaccounts/regus/take-back%E2%84%A2-programme/

 Goal is to establish circular flows of technical and biological nutrients
 “Waste” no longer exists, only inputs to the technical- or biological sphere
 Currently C2C is more about product (re-)design – radical business model
innovations supporting C2C are rare
 C2C certification available from Cradle to Cradle Products Innovation Institute
Cradle to Cradle (C2C)
Example: Gabriel
• The Danish company manufactures cradle-to-cradle
certified wool, called Gaja
• No harmful dyes, completely compostable
• Once decomposed in nature, the wool becomes part of a
biological cycle – as a nutrient
http://www.gabriel.dk/en/fabrics/textile/Gaja-C2C/30862

 Identifies business opportunities that leverage underutilized resources
 Aims to reduce costs and environmental impact of participating organisations
 Traditionally separated industries engage in exchanges through shared
facilities and material flows
 The by-products and residuals of one participant become the input of another
Industrial Symbiosis
Example: Industrial symbiosis of Kalundborg
• The first of its kind, consisting of seven companies
and the municipality of Kalundborg
• The companies exploit each other’s by-products
and residuals on a commercial basis
• E.g., 98% of the sulphur from the Asnæs Power
station is reused by plasterboard manufacturer
Gyproc
Source: http://www.symbiosis.dk/en

Riversimple – A Sustainable Business
Model in the Making

A Sustainable Business Model in the Making
Source: http://riversimple.com

Source: http://riversimple.com
(pictures show technology demonstrator, not final product)
Wales-based car designer RIVERSIMPLE
founded by Hugo Spowers aims to bring
about “mobility at zero cost to the planet”
“Whole system design”
+ new technology
+ new business model
+ new corporate governance

 Concept car “The Hyrban”
- Installed range: 220+ miles (350 km)
- Top speed: 50 mph (80 km/h)
- Weight: 520 kg
- Number of passengers: 2
- Emissions, well-to-wheel: <31g CO2/km
Source: http://www.40fires.org
(pictures show technology demonstrator, not final product)

• Affordable eco-mobility
• Personal mobility as service
• No hassle of ownership
• A car that lasts
• Start-up: seed / venture
capital
• Major revenue stream:
monthly leasing fee
• Distributed manufacturing
network with small facilities
• Open source approach
• Local provision of cars owned
by Riversimple
• Local refuelling network
• Refuelling for free
“Use-oriented PSS”
“Designing a car for this business model requires us to sell performance, not just cars.”

 Managed co-development and co-evolution of a whole ecosystem
- Technological artefact & infrastructure – Car & local refuelling network
- Business model – Eco-mobility as an all-in service
- Corporate governance – Open and stakeholder inclusive
 Addressing major barriers to sustainable business model innovation
- Environmental and social externalities – How to provide zero impact mobility?
→ Offering eco-efficient mobility as hassle-free, all-in, fee-based service
- Capital intensity and long lead time – How to finance RD&D?
→ Patient capital from purpose-driven seed capital investors
- The power of incumbents – How to overcome path dependence of one century?
→ Non-exclusive, open source and network approach to create a “movement”

 Business model innovation orientations employed
- “Maximise material and energy efficiency”
→ Light-weight construction, high-efficiency fuel cells and engines
- “Deliver functionality rather than ownership”
→ Riversimple owns the car, users pay an all-in fee
- “Develop scale-up solutions”
→ Open source approach, local, replicable production network
cf. Bocken et al., 2014

Where do we have to go? Future Research
1. Theoretical and conceptual integration of eco-innovation and SBM
→ elaboration on (dis-) similarities and overlap of both concepts
2. Understanding business models in their particular contexts
→ development of a contingent and context-sensitive approach
3. Assessing business models’ sustainability performance
→ development of methods for business model assessment
4. Test and evaluate business modelling tools and their outcomes
→ identify tools that (do not) work, e.g. in longitudinal studies

THANK YOU!
More about SBMs on
www.SustainableBusinessModel.org

Backup

www.SustainableBusinessModel.org 454 Nov 2015
Slide 45
A business model for sustainability helps
describing, analyzing, managing, and
communicating (i) a company’s sustainable
value proposition to its customers, and all
other stakeholders, (ii) how it creates and
delivers this value, (iii) and how it captures
economic value while maintaining or
regenerating natural, social, and economic
capital beyond its organizational boundaries.
Business Model for Sustainability Concept
Schaltegger et al., 2015

Business Model for Sustainability Concept
Normative requirements for business models for sustainability
1. The value proposition provides measurable ecological and/or social value in
concert with customer value.
2. The supply chain involves suppliers who take responsibility towards their own as
well as the focal company’s stakeholders.
3. The customer interface motivates customers to take responsibility for their
consumption as well as for the focal company’s stakeholders.
4. The financial model allows a just distribution of costs and benefits among
stakeholders and accounts for ecological and social effects.
Boons & Lüdeke-Freund, 2013

Literature
Bisgaard, T.; Henriksen, K. & Bjerre, M. (2012): Green Business Model Innovation - Conceptualisation, Next Practice and
Policy. Oslo: Nordic Innovation.
Bocken, N.; Short, S.; Rana, P. & Evans, S. (2014): A literature and practice review to develop sustainable business model
archetypes, Journal of Cleaner Production, Vol. 65, 42–56.
Boons, F. & Lüdeke-Freund, F. (2013): Business models for sustainable innovation: state-of-the-art and steps towards a
research agenda, Journal of Cleaner Production, Vol. 45, 9–19.
Breuer, H. & Lüdeke-Freund, F. (2015). Sustainability Innovation Pack. Online:
http://blog.ssbmg.com/2015/02/26/sustainability-innovation-pack/
Casadesus-Masanell, R. & Ricart, J. (2010): From Strategy to Business Models and onto Tactics, Long Range Planning,
Vol. 43, No. 2-3, 195–215.
Chesbrough, H. (2010): Business model innovation: opportunities and barriers, Long Range Planning, Vol. 43, No. 2/3,
354–363.
Johnson, M. (2010): Seizing the white space. Business model innovation for growth and renewal. Boston, MA: Harvard
Business Press.
Johnson, M.; Christensen, C. & Kagermann, H. (2008): Reinventing your business model, Harvard Business Review, Vol.
86, No. 12, 50–59.
Joyce, A.; Paquin, R. & Pigneur, Y. (2015): The triple layered business model canvas: a tool to design more sustainable
business models, ARTEM Organizational Creativity International Conference, 26-27 March 2015, Nancy, France.
Lüdeke-Freund, F. (2013): Business Models for Sustainability Innovation: Conceptual Foundations and the Case of Solar
Energy. Lüneburg: Leuphana University.

Literature
Osterwalder, A., & Pigneur, Y. (2009). Business model generation: A handbook for visionaries, game changers, and
challengers. Amsterdam.
Schaltegger, S. & Burritt, R. (2005): Corporate Sustainability, in: Folmer, H. & Tietenberg, T. (Eds.): International Yearbook
of Environmental and Resource Economics 2005/2006. Cheltenham: Edward Elgar, 185–222.
Schaltegger, S.; Hansen, E. & Lüdeke-Freund, F. (2015): Business Models for Sustainability: Origins, Present Research,
and Future Avenues, Organization & Environment, http://dx.doi.org/10.1177/1086026615599806.
Schmidt-Bleek, F. (2000): Factor 10 Manifesto, http://www.factor10-institute.org/files/F10_Manifesto_e.pdf
Upward, A. & Jones, P. (2015): An Ontology for Strongly Sustainable Business Models: Defining an Enterprise Framework
Compatible With Natural and Social Science, Organization & Environment,
http://dx.doi.org/10.1177/1086026615592933.
Upward, A. (2013): Towards an Ontology and Canvas for Strongly Sustainable Business Models: A Systemic Design
Science Exploration. Masters of Environmental Studies / Graduate Diploma in Business + Environment. Toronto:
York University.
Wells, P. (2013): Business Models for Sustainability. Cheltenham: Edward Elgar Publishing.
Wüstenhagen, R. & Boehnke, J. (2008): Business models for sustainable energy, in: Tukker, A.; Charter, M.; Vezzoli, C.;
Stø, E. & Andersen, M. M. (Eds.): Perspectives on radical changes to sustainable consumption and production.
System Innovation for Sustainability. Sheffield: Greenleaf Publishing, 70–79.
Wysocky, K. (2014): Riversimple, the Welsh dragon that spits water vapour,
http://www.bbc.com/autos/story/20141114-riversimple-the-welsh-dragon-that-spits-water-vapour

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