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SBM-I Series: Building Competitive Advantage in a Sustainable World

SBM-Is that effectively join sustainability and strategy deliver value by changing the business model to create new environmental and societal surplus linked to the business drivers of advantage and value creation.

COVID-19 and its resulting economic shocks are testing the resilience of companies — their business models, organizations, supply chains, and ecosystems — and their capacity to sustain the business, and benefit society in and beyond the crisis. And while COVID-19 is the immediate challenge, the broader context for doing business as before is increasingly constrained by planetary boundaries, societal needs, and rights to operate. The challenge then is how to release these constraints and open the space for new growth and value creation. That requires new ways to expand the business canvas, refresh strategy, and innovate business models to solve for SDG needs and create environmental and societal (E/S) surpluses that can fuel new business value (see Exhibit 1).

In the Quest for Sustainable Business Model Innovation, we introduced an approach for building the next generation of resilient, sustainable business models that optimize for social and business value (see Exhibit 2). The goal is to unite “sustainable competitive advantage” and “sustainability” to deliver Total Shareholder Return (TSR), Total Societal Impact (TSI), and ESG performance.

To understand just how far along companies are in building out sustainable business models, we examined some 300 corporate sustainability initiatives. We found 70 cases where companies changed some part of their business model to generate an environmental and societal surplus and business value. However, while many of these companies took significant steps on the quest for sustainable business model innovation, few captured the full potential possible through practicing a more fulsome and structured SBM-I process.

Why? We believe there are two main reasons. First, most companies have only begun the journey to SBM-I. Thus, they lack the necessary mindsets and muscles to go beyond corporate responsibility and compliance-driven approaches into conceiving strategies and operating models that really leverage the core business — sustainability as an advantage. Second, there has not yet been an integrated framework and discipline on designing SBM-Is for full value. This series of articles on SBM-I will introduce the frameworks and analytical tools to do so.

In this article, we look at the overall landscape of SBM-I today using the 70 case studies plotted against:

  1. The scale and scope of what the SBM-I is changing in the business
  2. The way the SBM-I is creating business advantage
  3. The magnitude of the environmental and societal surplus the SBM-I creates

Exhibit 3 depicts the space onto which we map each SBM-I.

The Scope and Scale of the SBM-I change

The horizontal axis of Exhibit 3 shows the scope and scale of the SBM-I change, the extent to which the SBM-I disrupts the business model.

In the first stage, the focus is on inventing or improving a product or process that can create a noteworthy environmental and societal surplus. For instance, the Swedish fintech Doconomy launched a new mobile banking platform “DO” and the accompanying credit card “DO Black” to help consumers track, limit, and offset the CO2 emissions associated with their purchases. This SBM-I has the potential to impact individual consumption by directing consumption towards more environmentally-friendly products and services. As use of DO Black expands, the collective environmental benefits grow.

In the second stage, the SBMI-I focuses on improving or reshaping the company’s value chain to achieve greater environmental and societal sustainability in its operations, upstream with its suppliers, and downstream with distributors and customers. Both Natura’s biodiversity and sustainable sourcing program in the Amazon and PepsiCo’s Sustainable Farming Program are good examples of innovations on the supplier front. Both companies work with small-holder farmers to implement regenerative agricultural practices and promote better livelihoods to ensure a sustainable supply of high-quality ingredients, murumuru for Natura’s Ekos products and potatoes for PepsiCo’s Lays chips. Downstream, Samsung and C&A use consumer-facing take-back and recovery programs to ‘close the loop’ and reduce waste. In 2018, Samsung’s large-scale e-waste recycling program was available in 54 countries and had collected 3.55 million tons of products since 2009. Since its recent launch C&A’s program has gained presence across Europe, Brazil and Mexico, collecting one thousand tons of used garments. While initially, these programs aim to manage waste responsibly, once at-scale, they can serve as a valuable source of input materials for more ‘circular’ or ‘closed loop’ models.

Some companies go even further to reimagine the business model for environmental and societal surplus that unlocks new growth opportunities from how value gets created, delivered, and captured. In some cases, a company executes a step-by-step transformation of the base business. Consider Schneider Electric’s IoT-enabled EcoStruxure platform, launched in 2007. With EcoStruxure, the company evolved from competing as a traditional electric installations player to becoming a global leader in digital sustainability solutions. By FY19, it had built a 27 billion euros business, while helping customers across almost half a million sites save 90 million metric tons of CO2 in 2018 and 2019 (equivalent to the annual emissions of Toronto or Melbourne). Others choose to disrupt a space by launching a new business. In Yara’s case, the company diversified beyond its traditional fertilizers business to launch new digital ‘smart’ agriculture solutions enhancing customers’ farming yields and their sustainability. In Fairphone’s case, its ambition was to produce and sell a more ethical and durable phone. Fairphone completely reimagined the consumer electronics supply chain, manufacturing and business model.

The fulcrum for business advantage in SBM-I

The vertical axis of Exhibit 3 illustrates the fulcrum for advantage from the SBM-I whether through the brand, reshaping the dynamics of the ecosystem, or changing the bases and boundaries of competition.

In the first level of business advantage, the SBM-I enhances and amplifies the brand with environmental and societal benefits to increase differentiation, competitiveness, and stakeholder value. Natura’s sustainable Ekos cosmetics line and Fairphone’s ethical phone both appeal to consumers who value sustainability and wholeness to respectively command loyalty and willingness-to-pay.

In the second type of advantage, the SBM-I shapes the business ecosystem and its stakeholder values and dynamics to create an advantage and new value. Through SBM-I the company can influence industry standards, regulations, or supplier and consumer behaviors to benefit the company and society. A good example is Dell’s Digital LifeCare Platform. Launched in April 2018, its societal proposition is enabling early screening and care delivery to reduce noncommunicable diseases for hard-to-reach populations in rural India. The company works with stakeholders across the ecosystem to deploy the platform — including the Indian Ministry of Health and Family Welfare, the Tata Trusts, and other NGOs. Through this SBM-I, the company is positioning itself for the long-term as integral to the country’s digital health infrastructure. Similarly, Royal DSM is partnering with the Rwandan public sector, international aid agencies, and local NGOs to improve nutrition security in the country. They launched Africa Improved Foods to build local markets for fortified foods, become a valuable partner to national SDG goals, and strategically position the company in a growing Africa.

The third level of advantage is creating a new playing field with reshaped boundaries of competition and stakeholder dynamics for new growth. Yara’s foray into digital farming, introduced earlier, is an example here of how SBM-I can create new competitive spaces and unlock new growth opportunities, by innovating to address and help solve macro societal and environmental challenges.

The magnitude of environmental and societal surplus from SBM-I

The third dimension in Exhibit 3 (the color scheme) signals the magnitude of meaningful environmental and societal (E/S) impacts created by the SBM-I against industry norms. As SBM-Is are refined and scaled, these impacts can grow. In Winning in the ’20s: Optimize for Both Social and Business Value, we note six dimensions of societal value that companies can create through their products, services, operations,, and value chains. These areas of common good include: economic vitality, environmental sustainability, lifetime well-being, ethical capacity, societal enablement, and access and inclusion.

We segmented our 70 case studies into three groups. In the first group, the environmental/ societal surplus is still limited in scale and often about mitigating the negative impacts of the business. It addresses symptoms of the environmental or societal issue rather than root causes. For instance, collecting and recycling plastics to increase the share of recycled content into packaging is an excellent first step. However, it does not achieve true “sustainable packaging,” as would fully circular or even packaging-free solutions. Similarly, ensuring animal welfare at the food production stage is essential. Still, it does not address head-on the challenges of emissions-intensive production of cattle for food.

In the second group, the SBM-I delivers significant environmental and societal surplus at a meaningful scale. And with additional expansion, it has high potential to address the root causes of the environmental or societal challenge. For instance, IBM’s Food Trust blockchain technology already creates a high environmental/ societal surplus by delivering unmatched levels of transparency throughout the food supply chain, to ensure integrity and safety from production to consumption. Such a platform supports the shift to better practices in supply chains across the world by tracking the sustainability of the underlying farming practices, the preservation of biodiversity, quality of farmer livelihoods and well-being, and the amount of CO2 emissions incurred in transportation.

The third group of SBM-Is are already creating high environmental/ societal surplus targeting the root causes, and there is further potential with scale. For instance, launched in Kenya in 2007, M-Pesa, Vodafone and Safaricom’s joint per-to-peer mobile money service for people without a bank account. Launched in Kenya in 2007, M-Pesa has increased the financial resilience of 40 million users in Africa, while creating income for 300,000 M-Pesa agents, and a healthy business for the telecommunications venture.

The SBM-I landscape today

The 70 SBM-Is studied cover business models from different geographies and industries — agriculture, consumer goods, apparel, telecommunications and technology, financial services and insurance, healthcare, industrial goods and energy and energy services. When these innovations are plotted against the dimensions discussed above, they offer a picture of the SBM-I landscape today as shown in Exhibit 4.

In Exhibit 4, 50% of SBM-Is emerge as ‘initiative leaders.’ These are SBM- focus on one product or business line and might emerge as the company ventures into finding new ways to address demands for more environmentally and societally mindful products, or in reaction to changes in regulations, or pressures from investors and NGOs. They improve on the current business model to mitigate any negative impacts and deliver the first level of advantage for the firm by enhancing the brand promise and the corporate reputation. Relevant examples here include recycled plastics packaging initiatives and e-waste take-back and recycling programs. While these SBM-Is initially help the company differentiate and enhance the brand from competitors, this advantage can fade as competitors replicate the initiative or join into industry coalitions. For example, most consumer packaged goods companies have now committed to reduce plastics through sustainable packaging. Similarly, most consumer electronics companies now have e-waste collection and recycling programs either on their own or in partnership with others. Sustaining advantage over time requires extending impact and strengthening ties to the business value drivers.

Moving to the center of the matrix, 25% of our sample qualifies as ‘ecosystem leaders.’ These are SBM-Is that are broader in scale, scope and impact. They emerge from a strong vision to turn environmental and societal challenges into new business opportunities. They also have the potential to create greater environmental and societal impact and a more fundamental advantage for the company. They often reimagine the company’s value chain and shape the ecosystem’s stakeholder dynamics to advantage. For example, Microsoft’s Airband initiative works with regulators and develops novel distribution partnerships with local telecommunications partners and internet service providers (including small- and medium-sized enterprises) to extend internet access across low-income and rural areas. The goal is to reach more than 40 million additional people in the U.S. and abroad by 2022.

25% of the SBM-Is studied are paving the way in the quest for sustainable business model innovation. These are ‘front-runners.’ Here, companies radically innovate to create new businesses from solving for the Sustainable Development Goals and creating environmental and societal surplus. Companies like Schneider Electric have already proven success at-scale (see Box 1), while others are in earlier days, such as Yara’s digital agriculture arm. These leading SBM-Is achieve more transformation, higher impact, and higher business advantage. They often leverage new technologies to break old trade-offs between common good and business value creation. They form new partnerships and engage with ecosystems and networks. And they fill capability gaps, unlock new markets, reach scale, and achieve more impact and advantage. While these SBM-I front runners still have room to further scale the environmental and societal impact and expand the business advantage they create. But they are closest to realizing ‘sustainability as an advantage.’

We will go deeper into best practices of ‘front-runners’ in a future article.

In Conclusion

SBM-Is that effectively join sustainability and strategy deliver value by changing the business model to create new environmental and societal surplus linked to the business drivers of advantage and value creation. Future articles in the SBM-I series will explore what makes some SBM-Is more robust and resilient and how companies can evolve and transform their SBM-Is to win in the ’20s while creating a better society and planet.

A closer look at Schneider Electric’s EcoStruxure platform

Launched in 2007, Schneider Electric’s digital, IOT-enabled EcoStruxure platform expands societal content by combining connected products and sensors, control hubs, and apps, analytics and services, in order to help customers measure and control energy usage; identify improvement opportunities in real time; and implement energy management solutions to boost efficiency and reduce overall consumption. EcoStruxure is emblematic of the company’s business reimagination away from being traditionally an electric installations player, into becoming a global leader in digital sustainability solutions.

By helping customers realize savings in millions of dollars spent on energy, EcoStruxure has achieved significant adoption and impact with more than 500,000 installations set up relying close to a billion of connected devices. In 2018, it sat at the core of Schneider Electric’s 27 billion euros revenues (with digital and services representing close to 50% of the company’s revenues) and is the foundation layer that enables the growth of additional business lines such as connected products. Through its scale, Schneider Electric is shaping the way customers manage their energy consumption and is becoming a reference point in energy management and efficiency. In other words, through this SBM-I, the company is able or has the potential to shape and influence ecosystem dynamics setting new industry standards and securing its competitive advantage.

On the environmental and societal front, EcoStruxure has helped customers save on average 20% (and up to 50%) of CO2 emissions, for a total of 90 million metric tons of CO2 saved in the 2018–2019 period — equivalent to the annual emissions of Toronto or Melbourne. With this impressive numbers, it falls into the category of SBM-I already creating high environmental surplus and targeting the root causes of the environmental issue — in this case energy consumption as a contributor to carbon emissions and climate change.

As we will detail in a future post, EcoStruxure is a highly ‘robust and resilient’ SBM-I. It scales effectively without diminishing returns, secures a very differentiated and defendable offering for Schneider Electric, harnesses business ecosystems for advantage and sustainability — indeed, both Schneider Electric’s sales and own carbon footprint are realized through establishing itself as an industry standard and scaling across customers’ installations. It also creates significant environmental/ societal surplus, that should remain durable against emerging trends (energy consumption management will continue to remain an essential part of the equation in the fight against climate change), and really animates the corporate Purpose, in a way that engages employees, customers, investors and other stakeholders — achieving many awards and recognitions from sustainability raters.

Looking ahead, this SBM-I still holds significant potential both for the company and for society. Environmental/ societal sustainability and business advantage are so intrinsically linked that growth in one dimension will reinforce growth in the other. And indeed, the company is aiming for 120 million metric tons of CO2 saved by 2020 through customers (up from 90 million in 2019), and a 25% increase in turnover for EcoStruxure Energy and Sustainability Services.

  • David Young

    Global Leader, Center for Climate & Sustainability

  • Marine Gerard

    Alum Ambassador (2020-2021), Sustainable Business Model Innovation

Sources & Notes