Business models evolve

9th August 2013

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Paul Suff finds out how company strategies are changing to become more sustainable

A business model is simply how a company plans to generate revenue and make a profit from its operations. Essentially, the model is designed to deliver, create and capture value.

Through its classic "bait and hook" business model, for example, Gillette sold its razor holder cheaply, making most of its money from customers' subsequent purchases of new razor blades. It is an approach more recently copied by printer manufacturers, whose relatively cheap home printers require consumables that are generally at least as costly.

Bait and hook is an example of the so-called "take, make, discard" linear approach to business, whereby raw materials are extracted to be turned into a product which, at the end of its life, is going to be sent to landfill or incinerated.

This kind of throwaway society and accompanying business model is no longer viable. As demand for goods and services escalates from a booming global population and as natural resources become ever scarcer, forcing up costs, many companies are searching for a new way of operating: one that is better for the environment, society and the company. Step forward the sustainable business model.

A change is going to come

Plan A, the business model Marks & Spencer is pursuing to realise its goal to be the world's most sustainable major retailer, is a high-profile example of a company changing how it operates to address new realities.

In January 2007, when the high-street retailer launched the 100 point plan (since expanded) setting 2012 targets for its carbon emissions, waste to landfill and supply chain, the then chief executive, Stuart Rose, proclaimed: "We believe a responsible business can be a profitable business. We are calling this 'Plan A' because there is no 'plan b'. Marks & Spencer will change beyond recognition the way it operates over the next five years."

Plan A is the retailer's response to growing pressure on finite resources brought about by the rising global population and expanding consumption-based middle class in countries like Brazil, China and India.

M&S says other factors, including the impact of climate change, greater scrutiny of business behaviour through social media and customers' desire for options that help them become more sustainable, will exacerbate the strain on natural resources. Climate change, for example, is likely to reduce the availability of raw materials, as extreme weather events affect international supply chains.

According to M&S, these pressures pose both risks and opportunities, and will mean existing business models are disrupted by sustainability for the first time. "Our use of the word 'disruption' highlights just how crucial we believe the business case for sustainability will become. In the short term, the business case will be about insulating business from short-term cost pressures; in the longer term, a more sophisticated business case is likely to emerge, predicated on opportunity, innovation and new revenue streams," stated a 2012 report from M&S entitled The key lessons from the Plan A business case.

Commercial carpet tile manufacturer Interface has been on a journey towards sustainability for a number of years. The company's founder, Ray Anderson, developed a new business model in the mid-1990s, which he described as being "for the prototypical company of the 21st century". It places sustainability at its heart and takes nature as its inspiration.

According to the Interface model, nature has some fundamental operating principles: it runs on sunlight and other renewable-energy sources; fits form to function; recycles everything and is extremely efficient - never creating excess or wasting; and rewards cooperation. Anderson translated these principles into his business model.

Nigel Stansfield, vice president and chief innovation officer at Interface, explains that the firm is working towards becoming the first fully sustainable company by 2020. "Our Mission Zero is about having zero negative impact," he says. "That's about ensuring there are no negative effects from our people, process or products. It's also about going further, to be restorative, putting back more than we take out from the environment and the community."

In June, BT, another firm with a tradition of embracing sustainability earlier than most, unveiled its "Net Good" strategy, which is focused on helping society live within the constraints of Earth's resources through the telecom company's products and services. "A growing global population means greater demand for the world's resources, some of which are finite. Doing less harm to the environment is no longer good enough. We want to be a force for 'net good'," states BT.

Net Good is part of BT's "Our better future" programme, which, according to chief sustainability officer Niall Dunne, signals the firm's evolution to a new business model. It is a model, says Dunne, requiring every part of the business and every employee to play a part in realising BT's vision and achieving its goals to create a better business with a better future.

Under its Net Good model, BT has set itself a 2020 goal to assist its customers in reducing their total carbon footprint by at least three times the "end-to-end" CO2 impact of its business.

"End-to-end emissions encompass not only our operational emissions, but those from our entire supply chain, as well as those from the equipment we supply to our customers," explains Kevin Moss, programme director for Net Good.

"We design and install the equipment, and we believe you can't provide a solution without taking responsibility for its carbon footprint."

Overall, BT's operations account for 8% of its end-to-end emissions, with suppliers contributing 64% and customers 28%. The firm plans to work with its customers to reduce their emissions through greater use of video conferencing technology and more flexible working arrangements. BT will also roll out less resource-intensive products.

Dax Lovegrove, head of business and industry at WWF UK, identifies BT as a good example of a firm trying to be "net positive", which he defines as generating new social and environmental benefits across the value chain that far outweigh the company's entire footprint.

"BT's Net Good is about being climate positive. Others, such Kingfisher, which owns DIY chains B&Q and Castorama, are pursuing a net positive model that includes being 'forest positive' - not just preventing deforestation but working towards reforestation," he says.

Less resource hungry

Net positive is one example of an emerging sustainable business model, but Lovegrove also highlights others, including the sharing economy, which unlocks the value of idle goods and reduces the need to actually own things, and the circular economy, which focuses on eliminating waste by maximising reusability and minimising value destruction of products and natural resources.

Both approaches aim to tackle head on the depletion of natural resources, which WWF's 2012 Living planet report revealed was accelerating. The study found that humans were using 50% more resources than the Earth could provide and that by 2030 even two planets will not be sufficient to satisfy demand.

"An increasing number of companies are experimenting with hiring and leasing their products, rather than customers having outright ownership," says Lovegrove. He cites BMW's "DriveNow" carsharing venture and Philips' "pay per lux" rental lighting option to illustrate how manufacturers are exploring new ways to enable customers to access their products.

DriveNow is available in four German cities and San Francisco and allows drivers to rent BMWi and Mini vehicles by the minute. "BMW is not simply an automobile manufacturer. There is a growing demand for flexible mobility products in urban areas," said board member Ian Robertson at the launch of the service in 2011. BMW is now planning to expand the DriveNow operation to more European cities and other countries.

Pay per lux is a new greener business model created by Philips, which the company has trialled in Dutch firms, such as Amsterdam-based architects RAU. It provides energy-saving, state-of-the-art lighting systems without any capital expenditure. Philips retains ownership and maintenance of the lighting after installation, with the customer paying only for the amount of light emitted. This encourages the deployment of energy-efficient products and advanced lighting controls, says Philips.

Kingfisher chief executive Ian Cheshire believes more companies will adopt such models as the current linear system becomes increasingly unsustainable. In 2011, he told a conference that B&Q was examining how it might shift from selling items such as power drills to selling the use of a drill, perhaps through leasing or fractional ownership.

"The other possibility is to redesign products in a cradle-to-cradle context, so we run the whole recycling loop, making our value-add from controlling the materials in the product rather than a one-time fire and forget sale."

Pay per lux is an example of such an approach, with Philips retaining control of the resources used in installed lighting equipment, raising the likelihood that they will be reused in its future products and helping to bring the circular economy into reality.

According to chief executive Frans van Houten: "For a sustainable world, the transition from a linear to a circular economy is a necessary boundary condition. A circular economy requires innovation in the areas of material, component and product reuse, as well as related business models."

Other companies are similarly seeking to develop circular-economy solutions. Caterpillar, the manufacturer of earth-moving equipment, has established a remanufacturing programme - called Cat Reman - based on an exchange system whereby customers return a used component in return for a remanufactured one.

Far fewer resources are consumed to remanufacture a component than to build a completely new one, confirms Caterpillar, adding that: "Through remanufacturing, we make one of the greatest contributions to sustainable development - keeping non-renewable resources in circulation for multiple lifetimes."

Shipping company Maersk has just taken delivery of the first of 20 Triple E vessels, the largest container ships in the world. Each ship comes with its own "cradle-to-cradle passport" containing details of the different types of steel and other metals used to build it. The passport will ensure that when a Triple E comes to the end of its life, recycling its 60,000 tonnes of steel can be done in a way that preserves the quality of the material.

"All 'old' ships are recycled but in most cases the different steels are often mixed in the process, which means the quality suffers and new iron ore has to be added when it is reused," says Jacob Sterling, head of environment and corporate social responsibility at Maersk.

"The idea behind the passport, which mirrors a similar system used by automotive manufacturers, is that all the materials used to build the ship are documented for recycling purposes so we can better manage global resources."

Meanwhile, a key feature of Mission Zero at Interface is to eliminate the need to manufacture carpet tiles from new raw materials. Stansfield says achieving this objective rests on redesigning processes and products so that all the resources used can be recovered and reused.

"We aim for a 'cyclical' process, which we refer to as 'closing the loop'," says Stansfield, explaining that the process is two-pronged, returning material either to the Earth or to its operations to produce new carpet.

It is a business model that has seen an increasing amount of Interface products made from recycled or bio-based content - 49% of total raw materials in 2012 up from just 1% in 1996. The company's ReEntry programme, which collects any carpet being replaced by an Interface product, has been running since 1995 and has so far diverted 121,000 tonnes of carpet from landfill. ReEntry has recently been upgraded following an innovation that separates yarn from carpet tile backing, ensuring each component retains its material value and can be more easily reused to manufacture new tiles.

Interface has not limited its recycling activities to carpet, however. "We are constantly expanding ReEntry to take in other waste streams than can provide us with raw materials," says Stansfield. For example, the carpet tile manufacturer has been working with one its key suppliers, the Italian firm Aquafil, to collect unwanted fishing nets from around the world, as the nylon used in the nets is the same that Interface uses for its carpet tiles.

Stansfield says the project has numerous benefits aside from being a source of material for its products, including providing an additional income to fishing communities in developing countries, and stopping nets being discarded in the sea and posing a hazard to the marine environment. Aquafil has built a regeneration plant in Slovenia to turn the nets - plus fluff (the top of carpets and rugs), rigid textiles and pre-consumer waste, such as carpet scraps - into nylon 6.

Clothing retailers are also embracing the recycling of materials, albeit tentatively. Mike Barry, head of sustainable business at Marks & Spencer, describes the launch last year of its clothes recycling initiative, "shwopping", as a new business model for M&S. Donated or shwopped clothes are given to Oxfam to resell. Unsold garments are recycled, with high-quality material made into new fabric and low-quality cloth used for things like loft insulation or car seat filling.

"The aim of the initiative is to dramatically reduce the 1 billion items of clothing that get sent to landfill in the UK each year," he says. Recently, M&S launched a limited edition coat made entirely from recycled fabric. The "shwop coat" costs half the price it would have had it been made from virgin wool.

The business case

Barry explains that Plan A has become more ambitious since it was first introduced.

"The sheer number of social and environment issues Plan A covers now is very different from 2007 when it was mostly driven by risk. We now consider our entire value chain, not just our own operations," he says.

"Also, the business case for Plan A is more demonstrable, with it generating a £135 million net benefit for the business in 2012, and it involves huge numbers of people, from 80,000 M&S employees to the thousands of workers in our supply chain."

In 2012, M&S extended Plan A to 180 commitments to achieve by 2015.

Similarly, Moss at BT says Net Good signals a new departure by the telecoms giant in addressing its carbon burden. "We no longer draw a boundary around our operations and say our emissions are only from our energy use and business travel. It now covers the entirety of our supply chain, plus our downstream [customers'] emissions."

Meanwhile, BMW expects DriveNow, which launched in 2011, to be profitable for the first time this year. The anticipated growth of megacities - Tokyo is expected to be home to 36 million people by 2030 - will make such alternative mobility solutions more attractive to conventional car companies. Analysts Frost & Sullivan have forecast a big expansion in carsharing, with three million people worldwide participating in 2013, rising to 26.2 million by 2020. Other major automotive manufacturers, including Daimler (Car2Go) and Peugeot (Mu), have already established similar carsharing business models.

As pressure grows to reduce resource use, more companies will have to follow the examples set by BT, BMW, Marks & Spencer and Interface, and adopt business models designed to use materials more effectively and change consumption patterns. Ultimately, such models must decouple growth from environmental impact if businesses are to survive and prosper.

In the words of Unilever's chief executive, Paul Polman, as he launched the firm's sustainable living plan in 2010: "Growth at any price is not viable. We have to develop new ways of doing business which will ensure that our growth does not come at the expense of the world's diminishing natural resources."

What makes a sustainable business model?

According to David Bent at Forum for the Future, a business model can only be sustainable if it meets the following criteria:

  • Commercial success - The proposition must be valuable to the customer and deliver a profit to the company.
  • Future ready - It must be able to succeed in a world of rising, volatile energy and commodity prices.
  • A sustainable society - It is not possible to be a sustainable business in an unsustainable economy. All business models rely on particular external conditions; to be called sustainable, those conditions must match with a thriving economy that is delivering social progress within environmental limits. Businesses should ask, for example, if their business model enables absolute decoupling of economic growth from environmental damage? Does it rely on nature providing materials or services for free? And does it rely on unfair terms of trade?

Business models can be executed in different ways, so business strategy matters too. Companies need to know how they will be competitive and how they will create the required conditions to be part of a sustainable society.


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