B327: Sustainable enterprises and innovation

B327: Sustainable enterprises and innovation

Chapter (external resources): Business models and stakeholders &

The impact of environmental sustainability on firm performance
Lectures 7 & 8 Outline
Definitions and conceptualisation of Business Models (BMs)

• A BM expresses a company’s business logic and is often understood as a conceptual

tool used primarily to create, deliver, and capture economic value.

• Specifically, a BM, which is layer-embedded between the company’s strategic vision

and its operational activities, is intended to describe how the strategy is
implemented in practice.

• A BM thus helps companies to respond quickly to changes in their business

environments and to improve the alignment of the organization and its strategy.

• As a result, BMs are crucial in terms of competitiveness, growth, and renewal.

 Types of BMs
• A GENERIC (general) BM is a combination of three main components: value
proposition (product/service, customer segments and relationships); value
creation & delivery system (key activities, resources, technologies, etc.); and
value capture (cost structure and revenue streams).
 Sustainable Business model (SBM)

• SBM can be defined in various ways, including as a narrative of sustainability

practices, a description of characteristics, a list of conditions, a representation of
processes, a description at firm or system-level.

• SBM can support organization to describe, analyse, manage and communicate its
value proposition, how it creates and delivers this value and the economic, social
and environmental value captured.

• SBMs connect corporate strategy to day-to-day activities.

Importance of setting a sustainable business model
• Amongst external factors that affect the incorporation of corporate
sustainability into business, the literature points out issues such as natural
environment and social general context, legislation, industry-specific
competitive dynamics and market, public opinion and technology level.

• The literature brings evidence, however, that not only external context
influences business models, but sustainable business models can also
proactively influence institutional structures towards behaviour in favour of
sustainability
A sustainable business model includes:
1. Value proposition: what value is embedded in the product/ service offered by the firm.

2. Supply chain: how are upstream relationships with suppliers structured and managed.

3. Customer interface: how are downstream relationships with customers structured and
managed.

4. Financial model: costs and benefits generated from the previous three concepts and their
distribution across business model stakeholders.

• For existing firms, it is possible to specify these elements. For new ventures this may be
unclear.

• In this context, a business model is used as a plan which specifies how a new venture can
become profitable. It is argued that a business model is a “market device”, an intermediary
between different innovation actors such as companies, financiers, research institutions,
etc., i.e., actors who shape innovation networks.
 A sustainable business model includes:
1- Value proposition
• It provides measurable ecological and/or social value in concert with economic value.

• It reflects a business-society dialog concerning the balance of economic, ecological and social
needs as such values are temporally and spatially determined.

• For existing products, a particular balance is embedded in existing practices of actors in the
production and consumption system;

• For new products or services, such a balance is actively being struck among participants in
the evolving alternative network of producers, consumers, and other associated actors.
 A sustainable business model includes:

2- Supply chain
• It involves suppliers who take responsibility towards their own as well as the focal company’s
stakeholders. The focal company does not shift its own socio-ecological burdens to its
suppliers.

• This condition requires that a firm actively engages suppliers into sustainable supply chain
management, which includes, for example, forms of social issue management and materials
cycles that avoid/reuse wastes.
A sustainable business model includes:
3- Customer interface:
• It motivates customers to take responsibility for their consumption as well as for the focal
company’s stakeholders. The focal company does not shift its own socio-ecological burdens
to its customers.

• Customer relationships are set up with recognition of the respective sustainability challenges
of differently developed markets as well as company-specific challenges resulting from its
individual supply chain configuration.

4- Financial model
• Reflects an appropriate distribution of economic costs and benefits among actors involved in
the business model and accounts for the company’s ecological and social impacts.
Business model for sustainable innovations (BMSI)
such as innovations encouraging sharing economy
• Business model innovation for sustainability, defined as “innovations that create
significant positive impacts and/or significantly reduced negative impacts for the
environment and/or society, through changes in the way the organization and its
value-network create, deliver value and capture value (i.e. create economic value)
[and/or] change their value proposition”.

• A BMSI is preferably designed with company stakeholders so that it creates

positive measurable business results (e.g. sales, customer retention, and
competitiveness) by its solutions to societal and environmental problems .
Stakeholders
• Designing a sustainable business model calls for rethinking which
stakeholders to involve.

• Focal organizations and stakeholders in their value network need to align on

three distinct dimensions: normative (regulatory), strategic and
instrumental.

• Sustainable business model innovations require redefinition of the purpose of

the enterprise based on sustainable value .

• This involves a discussion between focal organizations and stakeholders

on value propositions and how value is understood.
Business models vs. Sustainable Business Models
Stakeholder theory and the 3Ps (people, profit and
planet) perspective
• Stakeholder theory suggests that an “enterprise should pursue strategies that
consider the parties affected by its decisions” while trying to minimize damage
or maximize benefits to the representative groups

• The core concept of stakeholder theory is to think beyond just financial

performance.

• It can be seen that this fits neatly with the 3P (or triple-bottom line) paradigm of
doing business while avoiding harm to people and the planet as both propose
considering the range of potential consequences of environmentally related
decisions.
Stakeholder theory and the 3Ps (people, profit and
planet) perspective
• Core stakeholders include consumers, competitors, government and
NGOs, investors, supply chain partners, employees, and society as a
whole.
• These stakeholder groups are included as research suggests that the
characteristics of specific groups impact their ability to influence
organizational strategies (e.g., ability to generate political support,
access to unique resources, expertise, and personal preferences or
value).
Stakeholder INFLUENCES ON SUSTAINABILITY PRACTICES:

• Stakeholder influences can be direct or indirect based on:

The resource dependence between the focal firm and the stakeholder

The position of the focal firm in the stakeholder network.

• The stakeholder literature argues that Primary Stakeholders are important,

influential, and considered salient (important/crucial) in terms of their power,
legitimacy, and urgency, and ability to directly influence organizational
strategies. Examples include customers, shareholders, financial institutions,
insurers, trade associations, local communities, exclusive suppliers, senior
managers, regulators, governmental authorities, and media agencies.
Stakeholder INFLUENCES ON SUSTAINABILITY PRACTICES:
• Secondary Stakeholders that do not control resources critical to the focal firm’s
operations or those who do not have the attributes of saliency may be able to
influence the focal firm only indirectly via other stakeholders. Examples include
regular suppliers, employees, environmental or social Non-Governmental
Organisation (NGOs), special interest groups, and international regimes.

• Several stakeholders considered secondary such as local communities, non-

governmental organizations (NGOs), and international regimes (such as the
Intergovernmental Panel on Climate Change which coordinated the Kyoto Protocol),
have become more salient in assessing the social and ecological impacts of
business.
Resource interdependence view to decide what
stakeholders to involve?
• Based on resource
interdependence between the
focal firm and its stakeholders,
Frooman (1999) categorized
stakeholder influences into
‘usage’ and ‘withholding’ as
well as ‘direct’ and ‘indirect’
strategies.

• He presented four scenarios of

resource interdependence
 Resource interdependence view to decide what
stakeholders to involve?
First scenario:
• It is where the focal firm and its
stakeholders have high resource
interdependence on each other.
• Frooman (1999) argued that
under such conditions, the
stakeholders would be likely to
use a direct strategy to influence
the firm’s usage of the resources
so that their objectives were
accommodated.
Resource interdependence view to decide what
stakeholders to involve?
Second scenario:

• stakeholder power, stakeholders

control critical resources but are
not in turn resource dependent
on the firm.

• In such a scenario Frooman

(1999) argued that stakeholders
would be more likely to use a
direct strategy to withhold
resources from the focal firm
unless it adopted certain
practices.
Resource interdependence view to decide what
stakeholders to involve?
Third scenario:

• When the focal firm and the stakeholders have no

resource interdependence on each other.

• the stakeholders would be likely to exercise

indirect strategies via other stakeholders to either
influence usage of resources that the other
stakeholder holds or influence the other
stakeholder to withhold the resource from the
firm altogether.

• The type of strategy adopted would depend on

whether the stakeholders exercised influence via
stakeholders who, in turn, were resource
interdependent with the focal firm or via those
that held stakeholder power.
 Resource interdependence view to decide what
stakeholders to involve?
Fourth scenario:

• The stakeholder group is

resource dependent on the firm
but the firm has no resource
dependence on the stakeholder
group (e.g., minor suppliers and
easily replaceable employees).

• In such a situation, the firm’s

sustainability practices are
unlikely to be influenced by
stakeholder pressures.
Engagement strategies of stakeholders
• The degree of engagement will depend on the type of project and the type of stakeholders
involved.

• A stakeholder engagement plan is seen as a “prerequisite before engagement begins that

sets out who will be engaged with and how” .

• There are 4 types of stakeholders according to engagement strategies:

• Key players are stakeholders with high interest and influence.

• Context setters are highly influential stakeholders but having little interest.

• Subjects are stakeholders having high interest but low influence.

• Crowd stakeholders who have little interest or influence over desired outcomes.
Engagement strategies:
• Inform: To provide the public with balanced and objective information to assist them in
understanding the problem, alternatives, opportunities and/or solutions (Crowd Stakeholders).

• Consult: To obtain public feedback for decision-makers on analysis, alternatives and/or decisions
(Subjects).

• Involve: To work directly with the public throughout the process to ensure that public concerns
and aspirations are consistently understood and considered in decision making processes
(Context setters).

• Collaborate: To partner with the public in each aspect of the decision including the development
of alternatives and the identification of the preferred solution (Context setters).

• Empower: To place final decision-making in the hands of the public (Key players).
Importance of stakeholders’ engagement to sustainable enterprises
• Designing a sustainable business model requires rethinking which
stakeholders to involve.
• Stakeholders’ engagement involves a discussion between enterprises
and their stakeholders on value propositions and how value is
understood.
• Stakeholder theory suggests that an “enterprise should pursue
strategies that consider the parties affected by its decisions” while
trying to minimize damage or maximize benefits to the representative
groups.
• The core concept of stakeholder engagement is to think beyond just
financial performance.
• It can be seen that this fits neatly with the 3P (or triple-bottom line)
paradigm of doing business while avoiding harm to people and the
planet as both propose considering the range of potential
consequences of environmentally related decisions.
 The impact of environmental
sustainability on firm performance
Kimitaka Nishitani a,∗, Katsuhiko Kokubu , (2020), Can firms enhance economic performance by
contributing to sustainable consumption and production? Analyzing the patterns of influence of
environmental performance in Japanese manufacturing firms. Sustainable Production and
Consumption, 12 : pp: 156-169.
Does adopting environmentally friendly technology
and practices improve firm performance?
• Many firms implement environmental activities to improve environmental
performance, even though the implementation of such activities incurs additional costs

• A possible motivation for these firms is that better environmental performance has
become a key corporate priority to succeed in business.

• Most of the previous studies assumed that environmental performance and economic
performance have a positive linear relationship.

• However, such a relationship is not always applicable to the relationship between

environmental performance and economic performance.
Intervening variables
• This is because environmental activities to improve environmental performance incur
initial costs (that reflect both production costs and product prices), and therefore
environmental performance does not always have an immediate impact on economic
performance directly and indirectly through environmental disclosures.

• For example, even if a cleaner production approach is introduced, a certain level of

environmental performance may be required to realize environmental process
innovation, and it may take some time.

• In addition, it is also possible that such environmental innovation cannot be realized

easily depending on the type of environmental activities and performance, where the
necessary technology and its related costs are different
Intervening variables
• On the other hand, customers’ environmental preferences are related not only to the
environmental performance of the firm but also to environmentally friendly products.

• In this case, although a firm’s environmental process innovation can encourage its
environmental product innovation, there would be a lag for a firm’s environmental
process innovation to realize environmental product innovation, which reflects the
relationship between environmental performance and economic performance through
an increase in demand.

• If the price of environmentally friendly products sold by the firm has the same trend as
environmental product innovation that incurs additional costs, the relationship between
environmental performance and economic performance through an increase in demand
may just reflect the relationship between product price and economic performance
through an increase in demand.
Intervening variables
• For example, customers who are cost sensitive would buy the product only after
reaching a certain level of environmental performance where the price starts to
decrease.

• Firms cannot always enjoy the competitive advantage derived from better
environmental performance in the long term because new technologies will usually
become obsolete with time.

• When they become obsolete, maintaining better environmental performance could

become relatively expensive because of, for example, the need to introduce a cost-
ineffective production approach to further improve environmental performance.

• Because this will also affect product price, such a change could deteriorate economic
performance in the long term, not only through a deterioration of the production
process, but also a decrease in demand.
The role of corporate environmental disclosures
• Corporate environmental disclosures are sometimes analyzed as a part of social
disclosures.

• Corporate environmental disclosures are defined as “those that relate to the

impact of firms’ activities on the physical or natural environment in which they
operate”.

• Hence, corporate environmental disclosures reduce the information asymmetry of

a firm’s environmental activities and performance between insiders and outsiders.
The role of corporate environmental disclosures
• Environmental disclosures are classified into the following three types:

(1) A formal statement explaining the firm’s corporate environmental policy,

(2) A qualitative and quantitative description of the type of environmental

activities and performance implemented or achieved by the firm to show its
environmental commitment, and

(3) A combination of (1) and (2).

• Environmental disclosures include not only positive information, including fewer

emissions, use of recycled materials, or certification of products or processes, but
also negative information, including polluting events, or suits and fines related to
violations of environmental regulations .
The role of corporate environmental disclosures
• If stakeholder theory can be interpreted from an economic perspective, it is also
possible to conclude that firms attempt to satisfy customers as important
stakeholders to enhance their economic performance because important
stakeholders’ environmental preferences influence their economic performance.

• This idea is consistent with our expectation that customers’ awareness of the firm’s
environmental activities could result in strategic and financial benefits for the firm.