Over the last few years, a new business concept has emerged – sustainable business models. So far the term has been used to signal the need for businesses to go beyond innovating products or services, and change the fundamentals of how a business makes money.
Sustainable business models are all about identifying how companies cannot only generate value for themselves and their shareholders (in terms of profits) but also how they can create value for all stakeholders, such as society and the environment.
With increased consumer and investor awareness about global issues like climate change and pollution, companies need to factor sustainability into their business model in order to remain successful in the long-term. In fact, it is proven that purpose-driven companies generate higher profits and have a higher likelihood of survival, as can be read in these sustainability books.
What is Sustainability?
There is no commonly accepted definition of sustainability. Depending on the area of interest, there can be different ways to define sustainability. Generally, sustainability can be described as the capacity to support, maintain or endure and connecting the environment with society and economy. That way, sustainability aims to meet the needs of the present without compromising the ability of future generations to meet their own needs.
In recent years, the topic of sustainability has received increasing attention in public debates about climate change and pollution. Though, the word itself has become a buzz-word and is sometimes associated with greenwashing.
Based on the principles of the circular economy, sustainable business models emerged as a result of increased public awareness on sustainability and rising demands for green alternatives.
What are Sustainable Business Models?
Essentially, sustainable business models are business models that go beyond the generation of financial value to create a better world. They help in describing, analyzing, managing, and communicating companies’ sustainable value propositions to their customers and all other stakeholders, and how they create and deliver this value. Sustainable business models describe how these companies capture economic value while maintaining or regenerating natural, social, and economic capital beyond their organizational boundaries.
The following are the key characteristics of sustainable business models, which are derived from the stakeholder theory and also referred to as the three three principles of sustainable business or the “Triple P”:
- economically successful → profit
- socially responsible → people
- environmental friendly → planet
1. The "Profit" Principle
The first principle of sustainable business models is the “profit” principle, which addresses the bottom-line of every business: profit! Companies have to make profit to remain sustainable. They can only do good in the world if they generate financial value in the form of profits that they ca re-invest or donate.
That said however, profit still can’t outweigh the other two principles. Profit at any cost is not what the “profit” principle is about. It rather stands for compliance, proper governance and risk management. Traditionally, this principle has been the easiest to understand. Companies seeking economic sustainability aim for profitability, by efficiently using their assets and maintaining their capital.
The “profit” principle goes hand in hand with the circular economy, which is a systems solution framework that tackles global challenges like climate change, biodiversity loss, waste, and pollution while being used as a foundation for every sustainable business model.
2. The "People" Principle
The second principle of sustainable business models is the social principle, which is concerned with how companies’ employees but also other internal and external stakeholders are affected and treated by the operations of a company. “People” oriented businesses care about their employees’ welfare and maintain a connection with their workforces and stakeholders that go beyond just business relationships.
Socially-oriented companies with well-defined sustainable business models provide security, individual development and overall health support to employees, suppliers and partners. Something as simple as acknowledging your own employees’ work and rewarding them accordingly is significant in order to create a long term loyal workforce.
On a global scale, a business needs to be aware of how its supply chain is being operated. In order to be socially sustainable, companies need to make sure that the work environment along its supply chain is safe, that people are being paid fairly and no child labor is involved.
3. The "Planet" Principle
The first principle of sustainable business models is the “planet” principle, which stresses the impact of business activities and business decisions on the environment.
Now more than ever, it is important for companies to be aware how their business activities affect the environment, and to limit and change business activities that have damaging consequences for our earth.
Environmental initiatives that businesses take include finding alternative energy sources, reducing their carbon footprint, getting rid of plastic bags, and using sustainable materials for the packaging of their products such as paper. Last but not least, they might also make efforts to “green up” the entire supply chain of their products, pushing suppliers to act more environmentally responsible too.
A program can be considered “environmentally sustainable” when natural capital and environmental resources get preserved, maintained and not overexploited.
Why do we need Sustainable Business Models?
In times of climate change, global pollution, resource extinction, loss of biodiversity, and the rise of global pandemics such as COVID-19, we will need to find ways to manage our resources in a more sustainable way.
Today, the global economy:
- is releasing more than 10 million tonnes CO2 into the atmosphere every day.
- is cutting down more than 42 million trees per day.
- is producing 1 million tonnes of plastic a day, of which 32.000 tonnes end up in the ocean every day.
- is causing that more than 150 species are going extinct per day.
However, we need to maintain our economic activities as humanity couldn’t survive without them. For example, if we would stop our modern agricultural activities that have become highly efficient over the last decades and go back to traditional agriculture, we wouldn’t be able to feed the world. As a result, a large part of the human population would hunger and eventually starve.
This is is exactly why we need to make our global economy sustainable. By applying sustainable business models, companies cannot only ensure their future economic survival, but also the survival of humanity.
5 Sustainable Business Models Examples
1. Circular business
Currently, our economic system is based on a linear “take, make, dispose” approach in which goods are ultimately thrown away. However, there is no “away”! Therefore, we are in urgent need for businesses to transform from a linear approach to a circular approach.
Looking beyond the current extractive industrial model, the circular economy aims to create closed loop industrial systems and redefines growth, focusing on positive society-wide benefits. It entails gradually decoupling economic activity from the consumption of finite resources, and eliminating waste, with the overall goal for economies to grow in abundance.
For example, Adidas has a range of footwear designed with recycling in mind. Its UltraBoost DNA Loop shoes are made from just one material – thermoplastic polyurethane (TPU). No glue is used in its manufacture, instead, it is assembled using high temperatures. Adidas describes the UltraBoost Loop as the shoes customers will never own, but will instead return once they are finished with them. “If the end can become the beginning, we can help keep products in play and waste out of landfill”, the company says.
2. Sharing Economy & Product-Service Systems
Usually facilitated by a community-based online platform, the sharing economy is a peer-to-peer based economic model that involves the acquisition, provision, or sharing of access to goods and services. The underlying principles are so-called “product-service systems”, which are business models that provide for cohesive delivery of products and services. They are emerging as a means of collaborative consumption of products and services, with the aim of pro-environmental outcomes.
Examples of such systems include Airbnb, MudJeans, and Uber. All of these companies are selling a specific solution (instead of physical products) to their customers’ problem. For instance, what Uber customers are actually looking for is comfortable transportation, not a car. What Airbnb’s customers are actually looking for is short-term accommodations, not apartments. And what MudJeans customers are actually looking for is jeans, and not the ownership of clothes.
By sharing or refurbishing assets, such as textiles, accommodations, or cars, resources are used as efficient as possible and carbon emissions avoided. Furthermore, the sharing economy also solves other problems. For example, by reducing car ownership rates in cities, car sharing services are solving the problem of space taken away by parked cars.
3. Innovation & Biomimicry
Another way for companies to develop sustainable business models is by investing into R&D that is based on biomimicry, in order to drive innovation. Biomimicry is the imitation of models, systems, and elements of nature for the purpose of solving complex human problems. Sounds more complicated than it is!
An example for a product that was developed by the application of biomimicry are wind turbines. By looking at the bumpy tubercle fins of humpback whales, researchers found out that the same physiology could be applied to increase the efficiency of wind turbines. Thanks to this innovation, at wind speeds of only 10 miles per hour, the same amount of energy can be produced as with 17 miles per hour before the technology was applied. This drastically increased the amount of potential locations for wind turbines globally.
4. Cradle-to-Cradle
Linked to the concept of the circular economy, cradle-to-cradle focuses on eco-effectiveness rather than eco-efficiency. This framework is based on the idea of nutrient cycles. According to cradle-to-cradle, new designs for products need to involve clear planning for what to do with waste after a product’s usage, so that the product can “decompose and become food for plants and animals” or that they “can return to industrial cycles to supply high-quality raw materials for new products”. Cradle-to-Cradle is not about being less bad, but about being good from the beginning.
Several products that have either earned a C2C Certification or followed a similar design and production principle have been introduced in the market. Consider BioFoam as an example. Unlike expanded polystyrene or Styrofoam, which are made from polymers derived from fossil fuels, this patented biodegradable foam is made from vegetable materials. When discarded and disposed of, is material constituents become biological nutrients that can safely decompose while enriching the soil.
5. Reverse Logistics
Finally, reverse logistics are another way to move towards a sustainable business model. Organizations use reverse logistics when goods move from their destination back through the supply chain to the seller and potentially back to the suppliers. The goal is to regain value from the product or dispose of it. Worldwide, returns are worth almost a trillion dollars annually and have become increasingly common with the growth of ecommerce. The objectives of reverse logistics are to recoup value and ensure repeat customers. Less than 10% of in-store purchases are returned, compared to at least 30% of items ordered online. Savvy companies use reverse logistics to build customer loyalty and repeat business and to minimize losses related to returns.
A prime example of how to do this is that of French online fashion store Espace des Marques. The retailer has considerably lowered its number of returns with the Mecalux Group’s Easy WMS, which sends operators specific instructions on how to prepare each order, thus, avoiding mistakes. With this solution, the company has completely eliminated errors in order picking. Consequently, its customers are happier and don’t return as many purchases. Of course, there is still a percentage of returns not necessarily due to mistakes in the warehouse (e.g., changes in sizes, colors, and models).
How to Create Sustainable Business Models?
Build sustainability into the ethos of your business to tap into the over 50% of people who are changing their lives to become more environmentally friendly. There are simple steps that you can take in creating your business model that will allow you to compete for longer in this demanding sustainability shift.
However, before going through the following steps, take a look at the Sustainable Business Model Canvas and get familiar with the concept. Besides economic criteria it focusses on ecological and social consequences of the activity. It aims at maximizing positive and avoiding negative impact on society and nature. Therefore, sustainability is integrated into the core business. Fill it up with the most relevant information on your business (idea), and finally translate the business model into a business plan.
While doing so, consider the following steps:
1. Develop robust values
You can change a lot about your business, but you can’t change the core values once your business has grown – at least not without a lot of difficulty. By building sustainability into the core beliefs and values of your business, you create a stronger starting point that will be able to support future development.
2. Shape your values into something valuable
Your values cannot support your business on your own. The next step is to think about how your values will make your goods or services more valuable. A fashion business, for instance, cannot rely on simply having a sustainable value, the products still need to be fashionable. But when fashion and sustainability are working together, it increases the value of the product, making your business more attractive.
3. Focus on the future scale of your business
The assumption is that businesses will grow. When you are planning your business growth, consider how increased workforce, the need for larger premises, higher energy consumption, and geographical expansion might influence your sustainability. As your business grows, it will draw more on natural resources. Your job now is to consider how you can lighten that burden by planning for sustainability in the future.
4. Consider your resources
Every business uses resources. Are the resources your business uses sustainable? Where do they come from and how are they replenished? Are your supplies environmentally friendly from source or are you only looking at them from the middle of production onwards? It is your responsibility to know where your resources come from to ensure sustainability.
5. Give back
Stakeholders often place more long-term trust in businesses that have shown they value sustainability in tangible ways. This long-term trust is vital to your long-term growth. Find ways to give back to the community – volunteering, donating, going green, and joining sustainability initiatives are all good ways of giving back to the environment and the community that you want to support you.
6. Think sustainably
Consider ways in which your office or storefront could be more sustainable. It may be as simple as having more recycling options or changing to more energy-efficient lightbulbs. Or you could end up “greening” the whole building and switching to fully sustainable energy sources. Whichever it is, make sure that sustainability is constantly on your radar.
7. Promote sustainability
Finally, get your stakeholders, employees, and colleagues on board with your sustainability plans. The more support you have, the easier it will be to create corporate structures that support a sustainable business model.
