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Constructing Sustainable Business Models

Businesses are at the forefront of providing society’s needs—from basic necessities such as food and shelter, to more extraneous demands like transportation and communication. As international organizations and governments set more stringent sustainability targets, and deadlines for achieving sustainability goals loom closer, all sectors of society must contribute to achieving local, national, and global sustainability targets, especially the business sector. Therefore, all businesses — both in developed and developing countries — are responsible for assuring that they provide society’s needs in a sustainable manner. For businesses to become sustainable, they must look at their very foundation: their business model.

The Massachusetts Institute of Technology (MIT) Sloan Management Review recently released the research report The Innovation Bottom Line in partnership with The Boston Consulting Group (BCG) . The research report presents the results from the 2012 Sustainability & Innovation Global Executive Study and Research Report, a survey of over 4,000 executives and managers worldwide. One of the key findings of the report was that 48% of the respondents agree that sustainability has urged them to modify their business models. Additionally, 60% of the managers and executives also deem “pursuing sustainability-related strategies necessary to be competitive”.

Findings such as those in the MIT Sloan Review study support the indication that old business models which do not account for sustainability are going to be highly at risk in the future, while those that have already altered their business models today already have a head start in rising to the challenges and seizing business opportunities brought by sustainability.

Innovative solutions, when incorporated into business models, will make for sustainable business models . These business models integrate sustainability anywhere from companies’ value proposition to their operating models; making companies who implement them reap various benefits from measurable ones like trimmed costs and augmented profit, to the intangible but invaluable such as improved corporate reputation.

The Versatility of Sustainability Efforts: Providing Entry Points for Sustainability into Business Models

The Innovation Bottom Line features a business model framework created by BCG which emphasizes businesses’ value proposition and operating models —the two main business model components where sustainability can have entry points.

As companies conceptualize how to incorporate sustainability into their value proposition, they deliberate on what they can offer (sustainable products and services) and to whom (customers with demands for sustainable products). Specifically, visualizing the components of the value proposition entails companies to identify the target segments or the customers whose needs they attempt to address; the product or service offering , or what they offer to address the needs of their customers; and the revenue model , or how companies generate revenue from their products and services.

On the other hand, companies that design their operating models must answer the question, “How do they profitably deliver the offering?” BCG’s framework enumerated three main components of the operating model—namely the value chain, cost model , and organizational change. The value chain consists of the delivery methods for product or service to the customer, along with categorizing what companies do in-house and what they outsource. Organizing businesses’ cost model requires aligning company assets in order for companies to profit from effectively delivering their value proposition. Lastly, operating models factor in organizational change or planning the deployment and development of employees to “sustain and enhance” companies’ competitive advantage.

Sustainability-Driven Innovators: How they Integrate Sustainability Efforts that Create Business Value

It is important for companies who want to incorporate sustainability into their business to first acknowledge that they need to innovate and change certain elements of their model.

Companies with operative sustainable business models are called Sustainability-Driven Innovators, or those who are willing to change their processes and strategies due to the realization that sustainability brings value to their business, especially in the long-term.

Initiatives from Top-level Management

The success of creating sustainable business models are strongly anchored on the initiatives taken by a company’s executives. Senior management is the top stakeholder group that facilitates the integration of sustainability into business with 51% of the respondents on the MIT Sloan and BCG survey saying so.

There are companies wherein their own Chief Executive Officers (CEOs) serve as the sustainability champions for the entire company, while in others, leadership in creating sustainable business models is a shared responsibility among all top-level management. There is also the rise of a dedicated person to sustainability, otherwise known as the sustainability executive or Chief Sustainability Officer (CSO).

CEOs are primarily responsible for business success. Their views of sustainability and how it affects their business sets the tone for how their company will create sustainable business models. CEOs spearhead building a strong business case for sustainability — the incentive of their company is to allow sustainability to change the way they operate — all while balancing those alterations with market and stakeholder expectations, profit and continuous operations, and managing risks.

Other top-level managers can also participate in creating sustainable business models. A Chief Financial Officer (CFO) for example, is responsible for seeing the impact of sustainability to the monetary component of business — the expenses involved in accommodating sustainability into business, the revenue it can generate, and its effect on the bottom line. CFOs contribute to creating sustainable business models through ensuring the measurement of the impact of sustainability to the bottom line , accounting for sustainability and including them to annual financial reports. CFOs play a significant role in making the intangible and seemingly immeasurable benefits of sustainability to business and share that information internally, and to capital markets.

Some companies have their own sustainability executive, CSOs, or those in charge of conceptualizing, planning, implementing, monitoring, and evaluating all corporate sustainability initiatives. The extent of their responsibilities and the sustainability issues they address depend on the company’s values and their own strategies to maximize integrating sustainability across different business functions. Some CSOs are known to manage the environmental risks that the company faces along with managing sustainable resource use; improving product lifecycles, and eco-design for their products, services, and supply chain. Some CSOs have the added responsibility of securing stakeholder involvement for their company’s sustainability initiatives, along with internal and external reporting of their sustainability initiatives.

Measuring Progress and Integrating Sustainability into Annual Reviews

Creating effective sustainable business models also involve constant measurement of sustainability performance against goals.

The Innovation Bottom Line lists the use of scorecards, KPIs, and integrated reporting tools as the equipment of sustainability-driven innovators. Measuring sustainability performance allows for effective management of sustainability initiatives and ensuring the greater success of permanently integrating sustainability into one’s business model.

For example, the use of scorecards to evaluate suppliers based on their carbon and water footprint can help companies trace inefficiencies and minimize them either through collaborating with existing suppliers or switching to more efficient suppliers. Through market research, companies are able to identify the changing needs of their customers, and use that information to possibly profit from what consumers have to say.

Reviewing the company’s annual sustainability performance along with overall business success leads to the persistent innovation of sustainable business models. The Innovation Bottom Line reports that 37% of executives in their study specify that sustainability adds to their profit. Most of the respondents (67%) profit from innovative solutions inspired by sustainability. In line with this, 52% of the respondents said creating sustainable business models enabled them to address consumer needs for sustainable products and services, while 39% said sustainability enabled them to address resource scarcity — seeking sustainable alternatives and minimizing inefficiencies.

Sustainability also offers a number of intangible benefits to business. Accordingly, 52% of respondents claim that their business gained high ranks in global and/or regional sustainability performance, in addition to improving their company’s reputation. Similarly, 51% of executives surveyed trimmed down their operational costs with the help of their sustainable business models.

Through simultaneously reviewing financial and sustainability performance, more companies are able to identify the benefits of sustainability to their bottom line. Recognizing the effects of sustainability to the bottom line helps in quantifying the value that sustainability adds to business, thereby encouraging the further integration of sustainability into business models.

Incorporating Sustainability into Planning and Operations with Multi-Stakeholder Cooperation

Engaging both internal and external stakeholders is also vital for creating sustainable business models.

By creating a sustainable operating model, an organizational change that facilitates the integration of sustainability into all employee and executive activity is possible; an example of this is a company that wants to reduce its Scope 3 emissions by reducing employee travel. That company’s strategy can involve the increased participation of employees in webinars and video conferences to reduce air and land travel. As employees and executives cooperate with this strategy, they reduce fare expenses along with their overall carbon footprint . On a wider scale, there are countries that are beginning to lay out smart cities — efficiently designing and locating businesses and residences to minimize emissions. This kind of strategy involves not only companies; they must partner with governments, policy-makers, private and non-profit organizations to make such a huge undertaking possible.

Sustainability is Permanently Incorporated into Sustainable Business Models

Companies who have yet to embark on creating sustainable business models will do well to take a leaf out of the books of sustainably-operating companies: they see sustainability as the impetus of everything they do, and not merely as a one-time goal.

Effective sustainable business models are also those that are made to adapt to the changing societal, economic, and environmental contexts. Sustainable business models factor the needs of the consumers, the stakes of the communities surrounding the company, and sustainability policies and regulations promulgated by governments in their pursuit of business success. Sustainable business models help companies prepare for the economic forces influenced by the changing interactions between the markets of developed and developing countries. Companies in both segments can help manage commodity price risks from raw materials and will help in competitive pricing of their finished products. Additionally, they help prepare companies from the constantly changing environment. Designing sustainable business models involves helping abate and planning for the future effects of climate change, water scarcity , and ecosystem imbalance through sustainable product and service design, implementing of green supply chains, and organizational change.

FirstCarbon Solutions (FCS) Helps Build Sustainable Business Models

FCS has an extensive selection of cutting-edge sustainability solutions that can help companies modify their business models to integrate sustainability.

FCS offers Sustainability Solutions to help companies effectively manage climate performance, carbon emissions, and corporate social responsibility (CSR) reporting through its strong partnership with CDP.

FCS also offers lifecycle assessments, supplier scorecards, and carbon accounting to trace emission levels and inefficiencies across supply chains. Aside from cutting costs with FCS supply chain services companies can also help expand profit margins along with inspiring product and supply chain redesign.

FCS dependable sustainability consulting includes business case development, business intelligence, and due diligence services that are instrumental to developing new sustainable business models.

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