[start ded]
To Endre and Rannei Johanne Marie and Ada
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Contents – PART 1 – WHAT IS A SUSTAINABLE BUSINESS MODEL? 1
Creating sustainable business models 17
– PART 2 – HOW TO DESIGN A SUSTAINABLE BUSINESS MODEL? 3
Responsible and profitable 21
Business models: How companies create, deliver, and capture value 65
Strategies for sustainable business models 24
An overview of the business model 67
‘What’s the problem?’ as an approach to responsibility and profitability 29
Creating value: Finding the right ‘job’ for products and services 70
Interface: A sustainable business-model innovation 32
Delivering value: The resources and activities that take the value proposition to the customers 72
What’s the problem with responsibility and profitability? 34 The structure of the book 36
Capturing value: The logic to ensure that income is higher than costs 77
2
Examples of business models and the connections between them 82
The book’s building blocks: Business models and corporate responsibility 39
The business model: The story of how the company works 41 The book’s approach to business models 43 TOMS Shoes in a business-model perspective 45 Business-model innovation: Reinvent yourself before others do! 48 Corporate responsibility: The business’s ‘sunny side’ and ‘shadowy side’ 50 The core of the struggle: Two different perspectives on corporate responsibility 54 From CSR to CSV: Capitalism’s salvation or the emperor’s new clothes? 55
Business-model innovations in the book industry: Making history rather than becoming history 85 Even non-profit and public organizations have business models 87
4
Corporate Responsibility: Why? How? And so what? 91
Corporate responsibility and corporate performance 93 Corporate responsibility as an organizational phenomenon: Towards three relevant dimensions 95 Motivation: Why do companies invest in responsibility? 96 Integration: How do companies take responsibility? 100
Different approaches to responsibility: A two‑dimensional illustration 58
Effect: What is the profitability-effect of corporate responsibility? 103
Notes 61
The responsibility cube: A three-dimensional model of approaches to corporate responsibility 108
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From the business model and corporate responsibility to sustainable business models 117
Value reorientation 181 Sustainable business-model innovations as value reorientation 184
Sustainable business models 119
How to lead and manage a value reorientation 187
An overarching framework for responsible value creation, value delivery, and value capture 123
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Different possibilities and challenges in value chains, value networks, and value shops 127
Organizing for responsibility 193
Towards sustainable business models: Some prominent patterns in practice 131
Decision rights and organizational structure 197
Comprehensive responsibility-inducement 132 Partial responsibility-inducement 133 Facilitative responsibility-inducement 134
How to organize for sustainable business models? 191
Organizing as a strategic resource 195 Role titles and organizational roles 199 Boundary spanners and conversations with external stakeholders 202
Service-dominant responsibility-inducement 136
Measurement and control: Expertise and systems 205
Variations of a pattern: Sustainable business models within the main types 138
Reorganizing for sustainable business models 211
Summary 142
Incentives 208
Notes 213
Notes 143
– PART 3 – HOW TO IMPLEMENT A SUSTAINABLE BUSINESS MODEL? 6
Sustainable business modeling as strategic reformulation 147
Strategy is the solution – but what's the problem? 150
– PART 4 – CONCLUSION 9
A framework for sustainable business models 217
An overall framework 219 From business models and corporate responsibility to sustainable business models 221
Strategic reformulation of the problem of responsibility 154
Shedding light and reducing shadows through the business model 225
Strategy pictures: A practical framework for strategic reformulation 156
Conclusion 230
Strategy pictures and sustainable business-model innovations 161
Implementation of sustainable business models 227
Notes 231
TOMS Shoes: A paradoxical winner 163 Cermaq: Better performance through stakeholder dialogue, measurement and sustainability reporting 166
7
Leading and managing sustainable business-model innovations 173
Leadership and management control for responsibility and profitability 177
References 232 Acknowledgements 243 Appendix: One-for-one becomes more than two 245 Index 247
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– Chapter 2
The book’s building blocks: Business models and corporate responsibility In the course of a short period in the summer of 2006, film stars Scarlett Johansson and Kirsten Dunst were both seen in new and identical summer shoes on the streets of Los Angeles. At the same time, in a small chaotic flat on the outskirts of the Greater Los Angeles Area, Blake Mycoskie’s mobile telephone was about to melt. The order book was brimming. Two years before Mycoskie started a modest shoe company, TOMS Shoes, while on a vacation to Argentina, where he discovered that the traditional Argentinian summer shoe alpargatas could have a great deal of potential in the American market. He found some local producers who could sew them and he returned to Los Angeles with a large bag of shoes. The entire inventory was snugly placed in one bag, and Mycoskie’s room in a shared apartment served as headquarters for the business. Mycoskie sold the shoes from the bag quite quickly, and before long he had to return to Argentina to have more sewn. However, more important than the shoe’s design and comfort was the underlying idea that struck Mycoskie when he was in Argentina. He noticed that thousands of children in Latin America were shoeless and that this was an important factor in how diseases and infections were created, spread, and persisted among the impoverished children. Providing these children with shoes could make a big difference to their lives. So this is how Mycoskie’s business idea was conceived: one for one. For each pair of shoes he sold, he obliged himself to give a pair of TOMS shoes to a poor child in Argentina. This was Mycoskie’s business idea and at first glance it would be costly. Yet Mycoskie also had the remarkable story of the business to add to the equation. He found out that it was incredibly easy to communicate what TOMS was about: Buy a pair of shoes, and we give a pair to an impoverished child. The responses he 39
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received suggested that the story sold even better than the shoes themselves. And the story spread like wildfire. Two things should be noted with TOMS as an example of a sustainable business model. To begin with, the donation of shoes to poor children is a form of philanthropy, rather than an action that addresses responsibility as a result of the company’s core operations. When Blake Mycoskie decided that TOMS should donate shoes to poor children, it was not because TOMS had a definite responsibility in this regard. Rather, we can view TOMS as an actor that had an opportunity to do this, and, if we believe Mycoskie’s account, he felt that this was a problem that he ought to help solve. The perspective we put forward in this book, as well as most of the business models that we shall show in our examples, is oriented towards dealing with the problems that arise because of the company’s core operations. In contrast, TOMS exemplifies a business model where responsibility is at the center, but not the responsibility to deal with the company’s impact on society and the environment. This leads to the next point: TOMS Shoes has been the target of a number of criticisms for various reasons. It has been criticized for presenting a solution to poverty-related problems that does not solve the real problems. While the donation of shoes attracts attention and is positive for those who receive the shoes, critics believe that these measures can obstruct the development of other more fundamental solutions. Moreover, TOMS has been criticized for the lack of transparency regarding the production of shoes. While it holds the banner of responsibility high with the one-for-one model, it has been claimed that the company is less willing to make their value chain the object of investigation.4 Like the example of Vålerenga in the first chapter, the same caveat applies to TOMS: we do not claim that TOMS has solved all its problems connected to responsibility and sustainability, but it has developed a business model that has integrated responsibility and profitability in interesting ways and has created considerable value for both the business and the stakeholders. The story of Blake Mycoskie’s journey5 is fascinating and captivating. It begins with a trip to Argentina and ends with the roaring success of TOMS Shoes, which has also resulted in millions of shoes being donated to poor and unshod children. We have used this story as an introduction to this chapter because TOMS Shoes clearly illustrates the interplay between business models and corporate social responsibility (CSR) that this book addresses. The objective of this chapter is to go into greater depth with these two phenomena in order to render the building blocks of sustainable business models visible. The two building blocks correspond to the two main goals found in this book’s title – responsibility and profitability. In this work we aim to combine these in a 40
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framework that makes it possible to work in a structured manner towards realizing both goals simultaneously. In this chapter we first clarify the concept of the business model, which relates to the company’s efforts to create profitability. We show that the business model tells the story of what the company really is and how it really works. We do so by examining the essential components of a business model and demonstrating how they are connected and work together in the business. We also consider what a business-model innovation entails and argue that business models must continually be revised and developed so that they will not die out. Following this, we explore in depth the concept of corporate responsibility, which relates to the company’s attempt to attend to social and environmental considerations. We provide a historical account of the development of this concept – what it means and has meant – and we give the reader insight into ‘the struggle’ to fill this concept with content. Indeed, as we shall see, the meaning of corporate responsibility is not at all unambiguous. We shall, then, attempt to clarify our position, which we believe addresses some of the important problems in the literature. We also present a model that summarizes our understanding of corporate responsibility that encompasses the company’s ‘sunny side’ and ‘shadowy side’.
The business model: The story of how the company works The first building block in this book’s perspective is composed of business models in general and business-model innovations in particular. The concept of a business model first became a part of the everyday language of business economics following the Internet bubble of the 1990s and 2000s. Also significant were the many new Internet-based companies that placed business models on the agenda. Nevertheless, the business-model concept was far more fundamental than the difference between traditional and Internet-based companies. When we talk about a business model, we refer to what is perhaps most fundamental to the company: what is the company actually? For whom does it exist? How does it create value – both for itself and for other stakeholders? And how does it make sure it generates more income than costs, so that it can remain profitable over time? According to David Teece (2010), each organization is based on either an implicit or explicit business model that describes the design or architecture of the business’s value creation, value delivery, and value capture. This is in line with Osterwalder and Pigneur’s (2010) definition of a business model as the logic of 41
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how an organization creates, delivers, and captures value. Magretta (2002) has put forth the story-telling dimension when she describes the business model as the story that explains how the company works. And what characterizes companies that work? They create value for the customer and themselves by offering a product or a service that the customer wants and is willing to pay for. Yet there are two more important points. One is that the business has resources to create the actual value and an organizational design that makes it able both to produce and deliver the value to the customer. The other is that the business must do this in a way so that profits are made. The company must, therefore, be able to capture value from the value creation process.* These definitions of business models show some important characteristics of the business model as a phenomenon. First, the business model is a holistic model of the company as value-creator and value-capturer. In other words, it draws together the most important ideas of strategy, organization, control, and financing on which the company bases itself. The business model comprises the most important components that enable it to carry out what it is designed to do. This also develops what is meant by the notion that a business model is a kind of architecture or design. Secondly, a business model is a kind of story that explains how the company works. Ideally, a business model should be so clear and appealing that it enables us to describe what the business is and what it does in a few sentences. As a rule, good business models create good stories. This is consistent with the perspective put forth by Kim and Mauborgne (2005), who claim that a sensational and persuasive slogan, a ‘compelling tagline’, is one of the criteria of a good strategy. The story of TOMS is a good example of this, where the business model in itself (‘buy a pair of shoes, and we’ll give a pair to a poor child’) is such a powerful story that one can almost envision how the company must work. It should be noted, however, that these stories as a rule primarily relate to what the company circulates – that is, what kind of value the company offers and to whom. As we shall expand upon later, this is often called a ‘value proposition’. Simply put, a value proposition is what the business offers the customer for money, which also solves a problem for the customer (Johnson 2010). This forms the basis for creating value for the customer and for the company. Even if this is at the very core of the company’s *
According to the film about the respected record company Factory Records, the head of the company, Tony Wilson, made a cardinal error when Factory Records in 1983 released the single ‘Blue Monday’ by the band New Order. ‘Blue Monday’ became the highest-selling twelve-inch release ever. The problem, according to Wilson, was that the very determined graphic designer, Peter Saville, insisted on a cover design that was so expensive to produce that the record company lost money every time they sold a copy. The greater success it became, the greater the economic loss that was incurred.
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business model, it is still only half of the story. In addition, the company must work in a way that enables it to deliver what the value proposition offers in a profitable manner.
The book’s approach to business models Let us begin a more specific treatment of this topic in order to explain what a business model is and of what it consists. Different authors operate with different theories of what a business model comprises. What is common to most of these understandings of a business model is that it describes (1) the value that is being created and for whom it is created, (2) the resources that are needed to create the value, (3) how the company must be organized to realize this value creation, and (4) the logic that ensures that the value proposition has an acceptable price for the customer while also securing profitability for the company. In this book we build on a three-dimensional presentation of business models (see Figure 3). Our model brings together common features from a number of existing perspectives on the nature and function of a business model. Similarly to Osterwalder and Pigneur (2010), we regard the business model as the company’s logic for creating, delivering, and capturing value. This is illustrated in the three boxes in Figure 3.
Figur Figure 3: The business model: creating, delivering, and capturing value from business opportunities
CREATE Value proposition
Values from business opportunities DELIVER Resources and activities
CAPTURE Profit formula
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Furthermore, we follow Johnson’s (2010) elaborations of these three components, which also appear in the figure. The first and most fundamental is the value proposition, which we have already described as the offer that helps the customer to solve a problem or a job-to-be-done at a given price. This involves what one offers and how one offers it. For example, a car – which does the job of taking the customer from A to B – can be bought, leased, and rented, and it can be bought at a physical store or via a website. These kinds of fundamental choices are expressed in the value proposition. Secondly, a business model contains a ‘profit formula’. This is a formulation of how the company achieves profitability with the help of a given income-model and a given cost-structure. In addition the profit-formula has more specified goals, such as profit margins on each transaction and goals on turnover, that is, how fast the business’s resources have to be used in order to attain the desired profits. Finally, the business model includes the key resources and activities. This means, first, the strategic resources (physical, human, financial, and intellectual) that are required for delivering the value proposition. For example, we can consider the car dealer who needs capable salespeople in order to market the cars effectively. The car dealer also needs a place to show the cars, sufficient finances for buying new cars in large quantities, good IT systems for planning purchases and a brand name that elicits trust in the market. Secondly, the element of key resources and activities points to those activities that enable the company to deliver the value proposition effectively, dependably, and over time. This is about organizational conditions that enable the company to deliver value to the customer repeatedly without having to start from scratch every time. This includes a multitude of steady recurring activities that encompasses everything from budgeting, customer service, production, customer advice, training, market research, and so on. Together, the key resources and activities are about the strategic and organizational conditions that must be in place so that the company can create, deliver, and capture value over time. It is important to stress, however, that the company cannot carry out these activities solely on the basis of its own resources. For the business to be able to deliver value, it also needs suppliers and partners. We shall look closer at this important relationship to the surroundings in Chapter 3, where we explore the business-model concept even further. Finally, our conception of business models is in accordance with the perspective proposed by Amit and Zott (2001), whose business model consists of the content, governance, and structure* of transactions in order to be able to create
*
These three parts are in accordance with Johnson’s (2010) three-part division between value proposition, profit formula, and key resources and activities.
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value through taking advantage of business opportunities (cf. Zott et al. 2011). Consequently, the point of departure for a business model involves the identification, evaluation, and exploitation of business opportunities (cf. Foss & Klein 2012), which we have placed in the middle of Figure 3. As Zott and Amit also stress, these transactions are oriented towards the customers, partners, and sellers (cf. Osterwalder & Pigneur 2010). In other words, the business model encompasses value creation, value delivery, and value capture among all of these stakeholders. We could have based ourselves on other understandings of business models, but this three-part perspective points to what is most important. Business models capture the interplay between what the company produces and offers, the resources and activities that are necessary to carry these out, and the financial conditions within which they are done which are acceptable so that both the customer and the company can reach their goals. Thus, business models have much to do with strategy. As Chesbrough and Rosenbloom (2002) point out, the starting point of a business model is still how one creates value for the customer, and the rest of the model and strategy is built around that. This differs from traditional strategic thinking, where the business and its resources and surroundings typically compose the point of departure (cf. also Yip 2004). Furthermore, one is also able to make changes to the business model in the short term, while strategies are usually changed over a longer time (cf. Dahle et al. 2012). It is normal to regard the business model as the story of what the business does to create value for itself and its stakeholders. Strategy, however, deals with this in a unique way (differentiation) so that the business can withstand the competition from other businesses (Magretta 2002). We further discuss how organizations can go about developing and realizing strategies of differentiation when we discuss strategies for sustainable business models in Chapter 6.
TOMS Shoes in a business-model perspective Let us take a closer look at TOMS Shoes in this business-model perspective. TOMS Shoes’ value proposition is to offer the customer comfortable and aesthetically appealing summer shoes at a competitive price and at the same time the customer’s purchase of a pair of shoes initiates a donation of a similar shoe to a child in need. In this way two different value propositions are combined into one. A product is offered to the customer and the opportunity to contribute to help solve a social problem is also offered. The value proposition is characterized, then, by a clear interplay between responsibility and profitability. The value proposition also contains either an implicit or an explicit notion of to whom the 45
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value will be delivered. Put otherwise, it can be directed towards specific market segments (Teece 2010) or customer segments, with which a business may in some cases have pre-existing relations (Osterwalder & Pigneur 2010). For TOMS to be able to deliver its value proposition effectively and over time, the company has a number of key resources and activities. Among the most characteristic conditions that can be mentioned in connection with the value proposition are the designers and producers who can realize the special alpargatas shoes, co-workers, and external partners (e.g., voluntary organizations) that enable TOMS to operate a network of shoe suppliers to impoverished children in Latin America and other places around the world. Moreover, TOMS’ extensive presence in social media and the public eye also spreads the story of one for one. The company thus creates awareness and the desire to purchase among potential customers. In addition, there is, naturally, a wide range of strategic and organizational resources that enable TOMS to function. One condition that Mycoskie himself has stressed is that TOMS must be composed of a number of people who have worked for the company right from the start, and these people have been motivated by idealism and enthusiasm, which has been critical to TOMS’ success. An interesting case in the American market is when the American shoe competitor Skechers launched its BOBS collection, a relatively clear imitation of the TOMS concept that is also based on the one-for-one model. Skechers was, however, immediately punished by the market, and its brand name was damaged by the wave of negative responses because of the perception that this initiative was not authentic. As American shoe-buyers saw it, TOMS was in effect ‘the owner’ of the one-for-one model. It was regarded as a kind of theft that other companies would base themselves on the same business model in the same market. This is the kind of goodwill that is almost invaluable for a company in a highly competitive market. It illustrates how TOMS, through its distinctive form of value creation, also laid the groundwork for its value capture. It has perhaps succeeded because its customers really wish for its success. This points to a characteristic of the business model that Osterwalder and Pigneur (2010) treat as its own business-model component, namely customer relations. Through TOMS’ unique story and attractive value proposition, the company has built relations with both customers and non-customers. This relation makes the product attractive and the story is then passed on from person to person. In this regard, the story and the relations that result from it constitute a prominent strategic resource for TOMS. Finally, TOMS has clearly succeeded in developing a profit formula that enables it to capture value on the foundation of the value proposition. Indeed, at the 46
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outset, TOMS’ value proposition was risky, since the business bound itself to a considerable expense for every transaction generated. With the help of relationships built with customers and the wide dissemination of its story, TOMS has succeeded in creating enormous enthusiasm for its brand name so that the increased income that results from one-for-one is larger than the costs of giving away shoes and of running the network that makes this possible. To be sure, economies of scale have something to do with this, because the total number of shoes and other products that TOMS sells in a year has grown dramatically. The founder himself, Mycoskie, has pointed out that one of the reasons for TOMS’ success is that it has kept its costs low by employing workers who share its vision and who conduct themselves frugally in all circumstances. Accordingly, TOMS’ overhead costs have not increased in the way that might be expected, given its huge success. This leads to a profit formula that has enabled TOMS to realize substantial value for the company while also making both its customers and the recipients of the free shoes content. In Table 1 we summarize this discussion of TOMS’ business model. In addition, we include a description of Vålerenga and Interface, which we examined in Chapter 1.
Table
TOMS Shoes
Vålerenga
Interface
Create
Two-part value proposition: customers get attractive shoes and get to contribute to solving a social problem.
Two-part value proposition: customers get to enjoy football while also working against racism and other social problems.
Two-part value proposition: customers get good quality and reasonably priced carpets while also reducing the ecological footprint towards zero.
Deliver
Has idealistic and engaged employees, important partners in design and distribution, and a considerable presence in various media that spreads the story.
Has employees and volunteers who work with responsibility, has agreements with several other organizations and integrates this with its work with youth.
Uses only recycled materials, bases its production on renewable energy, and has changed its process of production.
Capture
Relatively high price, while high demand provides economies of scale. Low expenses because it employs enthusiasts and interns, marketing is done through ‘the grapevine’, and voluntary organizations distribute the shoes.
Receives economic support, has attained a favorable building-site agreement for a new stadium, attracts and sells high-calibre players from different cultures, has an eager body of followers who identify with the club.
Has become the leader in keeping expenses low in the industry, has raised the customers’ willingness to pay owing to its environmental profile and has therefore in total better margins.
This overview sheds light on the business models of TOMS, Vålerenga, and Interface through the three-part model. The overview shows how the different components in the business model work together to enable these organizations to create, deliver, and capture value. As mentioned in the beginning, it is also the case that those companies that manage to create successful business models must regularly recreate these business models. When they encounter new surroundings, new conditions, and new developments, they must implement some
Table 1: A summary of the business models of TOMS Shoes, Vålerenga, and Interface.
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changes in the way they create, deliver or capture value. They must also carry out business-model innovations in order to remain competitive in the midst of the surroundings’ changing expectations – either these changes will force themselves onto the company or the company will proactively create them.
Business-model innovation: Reinvent yourself before others do! There was maybe a time when it was sufficient for a manager to master one – and only one – business model. Today, however, most organizations – whether they are private, public, or voluntary – have to accept that it is not enough to fine-tune existing business models. Instead, what is needed is constant renewal. The shorter lengths of time in which companies survive in the S&P today are an indication of once-successful companies lacking the ability to do this. As Kaplan (2012) noted, if there is something that is certain in the new millennium, it is that the rate of change is high due to new technologies, new ideas, and new practices that spread with great speed. Avoiding changing oneself while the surroundings change, and while other organizations are gladly able to solve the customer’s problems in new ways, would have to be at the very least an active choice. But without having a tool for understanding oneself and the surroundings, one can unwillingly become a victim of the innovative initiatives of others. The question is how organizations should address this pressure to change and which tools they should employ to put themselves in the driver’s seat, instead of being placed in the passenger seat. We assert that this question must be answered at the business-model level. Business models are in themselves something dynamic, since business models consist of the interplay between the different components that enable business to create, deliver, and capture value. Business-model innovations show, then, another layer of dynamics with regard to a company’s business model, since they highlight the company’s willingness and ability to execute innovative changes in the ways it operates. The concept of business-model innovation can refer to (1) the establishment of a new business that is launching a new and innovative business model that either creates a new market or changes the conditions of competition in an existing market, and (2) an existing business that is changing or recreating the present business model in a way that has the same result (see e.g., Amit & Zott 2012; Johnson 2010; Chesbrough 2007). Business-model innovations thus break new ground in the market by delivering value in a better way than existing business models (Kaplan 2012). This can relate to changes in one of the three boxes in 48
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Figure 3 – value creation, value delivery, and value capture – or in the way they relate to each other. To begin with, a business-model innovation can be about changes in what is delivered. Here, the value proposition is changed in such a way that the customer experiences new kinds of value. TOMS Shoes exemplifies this with buyers of TOMS receiving ‘with purchase’ the assurance that the transaction has set off a donation of a pair of shoes to a child in need. Secondly, it can also relate to changes in how the value proposition is delivered to the customer. In other words, the value proposition is realized in another way. Apple’s customers, for instance, found a whole new way of buying music when iTunes was launched, and the customers received a suitable and extensive service for the legal purchase and downloading of music. Finally, a business-model innovation can also be about changes in how the company captures value by being paid for the product or service. The musicstreaming service Spotify provides a good example: customers pay for a yearly subscription to be able to stream as much music as they wish from Spotify’s vast catalogue, instead of paying singly for music files. This means that business-model innovations require a rewriting of the story of the business and how it works (cf. Johnson 2010). What is distinctive with business-model innovations is that they also change the rules of the game in the market by introducing hitherto unused ways of creating, delivering, and capturing value. Such changes also affect the other actors in the market. The example of TOMS Shoes shows in many ways how the establishment of this business led to a business-model innovation. First of all, TOMS’ value proposition has led to a broadening of what is normally offered to shoe customers, with a purchase setting off a corresponding donation of a pair of shoes. TOMS’ innovation has in this way the particular characteristic of the value proposition in parallel offering value to the paying customer and the receiver of the donation. Therefore it makes sense to characterize TOMS as an example of social entrepreneurship, since it contributes to solving a social problem through its business model (cf. Praszkier & Nowak 2011). While many social entrepreneurs are non-profit organizations, TOMS has done social good while also having the goal of profitability, and it has succeeded in realizing both objectives. Another innovative characteristic of TOMS’ business model is that it uses a story that is integral to its business model as a resource for building relations with customers and non-customers alike. Through this, it is able to cover the increased costs related to donating shoes by dramatically expanding the market for its shoes. This makes possible the running of the extensive networks necessary for carrying out the donations of shoes and the follow-up in the many countries in which it operates. This would hardly be 49
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possible if the amount of shoes sold were substantially smaller. Because of this, a great deal of resources has been devoted to building up and developing activities that promote the brand name connected to the community of TOMS supporters (cf. Mycoskie 2011). These supporters spread and enliven the story of TOMS, and by doing so they ‘recruit’ even more supporters who in turn spread more awareness about the company and what it stands for. It should be noted that while TOMS has introduced a business-model innovation that brings something new to the shoe market, this does not represent a ‘game-changing’ innovation that makes it impossible to continue competing in the market on the basis of old premises. Of course, there are many shoe manufacturers that do not seek to solve social problems, and they are still profitable. What is special about TOMS is that the company has established a new niche in the shoe market where it is very demanding to compete, as the example of Skechers illustrates. TOMS has thus created a new ‘market space’ where it enjoys very favorable conditions of competition. It has been successful in differentiating itself from the competition by offering a new and innovative value proposition. The story of TOMS is not only about a successful business model; it is also the story of a company built upon an idea of responsibility. Not least, the story shows how in a very successful manner TOMS was able to take responsibility and did so in such a way that it led to its business model becoming very competitive while also introducing an innovation in the shoe market. To see how we can connect business-model innovation with corporate responsibility, we shall now proceed to an examination of the phenomenon of corporate responsibility.
Corporate responsibility: The business’s ‘sunny side’ and ‘shadowy side’ The other building block in this book’s perspective is corporate responsibility. Corporate responsibility is a prominent theme in both theory and practice, and we can see an active interest in corporate responsibility in companies and public organizations and at business schools and other similar educational institutions. Since we received our education less than a decade ago, this has been a significant change. The discussion of what corporate responsibility is and what it should be is, however, far from being something new. According to Carroll and Shabana (2010), the present understanding of corporate responsibility can be traced at least as far back as the decades following the Second World War. As early as 1958 Theodore Levitt published an impassioned polemic against CSR in the Harvard Business 50
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Review and stressed the dangers of asking businesses to take over tasks that should be left to governments.* And 12 years later, when Milton Friedman published the landmark article ‘The social responsibility of business is to increase its profits’ in The New York Times Magazine, an important part of the DNA of business-administration studies was fortified. Here, Friedman argues that if businesses were to use money with the intention of being responsible beyond what is required by law, they would in reality be taking money from the pockets of the business owners. In Friedman’s view, the most appropriate route to responsible business operations is to let the owners earn money so that they can pay taxes and to let the state deal with social tasks and regulate the economy to the degree that is necessary. The assumption is that business managers will in this way be motivated to look after stakeholders, because it will lead to satisfied customers and partners that will wish to continue their association with the company. Taking care of stakeholders can thus be an element of the company’s enlightened self-interest. Friedman’s argument was dominant in business-administration studies for over a decade and it still has considerable influence. Edward Freeman, however, formulated a clear opposing position in 1984 with the publication of the book Strategic management: a stakeholder approach. Freeman put forth the perspective that a company has a considerable responsibility with regard to a number of internal and external stakeholders who are affected by the company’s activities. According to Freeman, these relationships of responsibility are just as fundamental as the company’s responsibility to the owners, since the stakeholders are exposed to a range of negative effects resulting from the company’s operations. The stakeholder perspective has since gained a foothold in business-administration studies on the basis of both morally and strategically motivated arguments. It is quite likely that only a small proportion of companies today do not take into account in any way the stakeholder perspective. Still, the criticism aimed against the idea that companies have a responsibility above complying with the law still exists – and the debate around what the company’s CSR consists of is in no way over.6 We shall discuss these dividing lines further, but we would first like to take a closer look at the concept of CSR as it is used today. According to the EU’s (2011) influential A renewed strategy 2011-2014 for corporate social responsibility, CSR refers to the company’s integration of social, envi*
The division of labor between companies and governments with respect to CSR is one of the main questions in the literature. This question is beyond the scope of this book, for we deal primarily with CSR as a phenomenon of business administration. We are concerned with the business as actor and the consequences of its choices on the environment and society. We emphasize, therefore, the challenges and possibilities these externalities present to the company as a value-creator. Our perspective, then, has some blind spots – for example, the incentives that result from governmental regulations. We touch upon this indirectly in Chapter 4.
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ronmental, ethical, and human-rights considerations in its strategy and activities. In short, it is about how the company is able to include social and environmental objectives and issues in its strategy, control, and practice. Thus, it is closely tied to the logic of a triple bottom line, which bases itself on the assertion that the company’s performance must be evaluated along economic, social, and environmental dimensions (Elkington 1998; cf. also Ingebrigtsen & Jacobsen 2007). Responsible operations thus involve a multi-dimensional understanding of the company’s performance and activities, which have consequences for strategy, leadership, and control. In practice, responsibility demands that companies devise specific and realistic objectives relating to the consideration of social and environmental values (Carroll 1978), and that the objectives can be combined with the company’s principal strategies and goals (Werther & Chandler 2011). This means that the companies must measure the effects of these kinds of non-financial dimensions and, ideally, these must be incorporated into the company’s systems of rewards and incentives to promote performance along social and environmental dimensions (cf. Pedersen 2013b). The starting point for corporate responsibility is companies’ creation of externalities (cf. e.g., Crouch 2006; Laudal 2012). This term refers to the positive or negative side effects of the company’s activities, which directly or indirectly affect stakeholders within and without the company (Laffont 2008). The taxable income to the community is a positive externality of the company’s activities, while pollution of the groundwater in the area around a factory is an example of a negative externality. This constitutes the point of departure for the so-called stakeholder perspective, which contends that the company has a responsibility to internal and external stakeholders that are affected by the company’s operations, that is, those who experience negative externalities owing to the company’s activities. Stakeholders are defined as individuals or groups that can affect or are affected by the business’s activities (Freeman 1984). Responsible strategies and measures will typically be oriented towards certain stakeholder groups.* More recent stakeholder theories have also indicated the characteristics among stakeholders that compel these groups’ prioritization –for both moral and strategic reasons (cf. e.g., Mitchell et al. 1997). A result of this approach is that business operations have both a ‘sunny side’ and a ‘shadowy side’. By this we mean that most companies in many different ways take responsibility in ways that contribute to dealing with or solving social *
Zott and Amit (2007: 181) emphasize that the business model also shows how the organization is connected to external stakeholders and how they enter into economic transactions with them to create value for all participants in the trading situation.
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and environmental problems through their activities. With this understanding, we have chosen to base our treatment of corporate responsibility on a metaphor formulated by Eells and Walton (1961). These authors have claimed that corporate responsibility refers to ‘the problems that arise when corporate enterprise casts its shadow on the social scene’. In a slightly more optimistic perspective we can say that companies have both a sunny and a shadowy side in the sense that their business operations lead to both positive and negative externalities. We claim that we must operate with a concept of corporate responsibility that encompasses both of these understandings. When TOMS Shoes chooses to contribute to solving the problem of poverty as a part of its strategy, this represents a sunny rather than a shadowy aspect, if we follow Eells and Walton’s metaphor. In this way, TOMS takes responsibility by using resources in a manner that creates value for others. This does not mean, however, that TOMS does not cast shadows of its own. Presumably, there are social or environmental problems with the way it designs, produces, and distributes the shoes, and this is the shadowy side that TOMS must respond to. We must, therefore, look at the company’s sunny and shadowy sides as a function of the activities it carries out, and as a result each company’s CSR is specific to its current operations. Corporate responsibility is, of course, also relevant to organizations that do not have profitability as an objective, like public or non-profit organizations. The responsibility of such organizations often appears to be clearer. This clarity could, for example, be because the organization is assigned a given administrative responsibility for public good (e.g., child welfare, which is established to care for children who have been subject to neglect), or because the organization itself has formulated a social task (e.g., Greenpeace, which has been involved with activism and consciousness-raising of the need to protect the planet). Inasmuch as these organizations do not have profitability as their main objective and do not have any legal responsibility towards shareholders, they have more latitude to found their organizations’ practices on ideas and values about responsibility. Yet these organizations also enter into relations with other stakeholders and affect them, and therefore have to attend to these relations in the same way. One example of this issue that has been raised is charitable organizations’ use of gambling machines as a source of income. A number of questions that are germane to private organizations that seek profits can also have, therefore, a bearing on organizations that do not have this objective.
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The core of the struggle: Two different perspectives on corporate responsibility There are at least two relevant perspectives on corporate responsibility that apply to every organization. An essential difference in this regard is connected to the handling of negative externalities that arise because of the organization’s business operations, on the one hand, and the possibility of creating positive externalities for society and the environment, on the other. Regarding the former, corporate responsibility deals with how the company contributes to advancing social or environmental objectives as a part of its business operations. We have identified this as the company’s sunny side. One example of this is TOMS Shoes’ donations. Another well-known example can be found in the Norwegian clothing company Stormberg, with its objective of attaining 25 per cent of employees who are young people who have had problems entering the job market for various reasons. What these examples have in common, in a business-model perspective, is that they both have built-in social or environmental objectives in the value proposition or in the key resources and activities that go beyond the stakeholders’ expectations from the start. If we turn to Eells and Walton’s (1961) metaphor, we can say that these show the company’s sunny side in so far as they reflect the social and environmental value created by the company through its operations. Yet corporate responsibility is also about identifying and dealing with the negative effects of the company’s operations for stakeholders within and without the business. We have termed these negative effects as the company’s shadowy side. One example we have seen is the transformation of the carpet producer Interface, which entailed making sweeping changes in the company’s key resources, together with adapting production, distribution, and recycling activities in order to reduce the business’s ecological footprint. Other well-known examples are IKEA and Nike, both of which were forced to deal with the problem of child labor among the suppliers in the value chain (cf. e.g., Kolk & van Tulder 2002), and Google, which terminated the practice of censoring controversial search words in the Chinese version of the website after enduring a flood of criticism. From a business-model perspective, what all of these examples have in common is that they show changes that were aimed at dealing with issues of responsibility that have arisen because of business operations. These changes have therefore accommodated the interests and expectations of both internal and external stakeholders. If we continue to look at this through Eells and Walton’s metaphor, we can say that this reflects issues relating to the company’s shadowy side. The central point is that this addresses social and environmental problems that can be created by the company through its operations. 54
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These two perspectives relate to two competing understandings of corporate responsibility. These two understandings claim, respectively, that companies ought to take responsibility for moral reasons, and that, if the company wishes to, it can take responsibility for self-interested, economically motivated reasons.* The logic of the former is that it behoves companies to ‘clean up after themselves’ and to ensure that they do not cause stakeholders unacceptable harm through their operations. This is often referred to as normative CSR, since it is an approach that is based on the company’s moral duty to ensure that its operations do not lead to negative externalities for affected parties to an unacceptable degree. In contrast, the other logic is based on the notion that the business can turn responsibility into a competitive advantage and thus create ‘win-win’ situations for itself, society, and the environment (cf. e.g., Werther & Chandler 2011). This is called strategic CSR, since it describes responsibility measures being adapted – or subjected– to the company’s strategic goals. Taken to its furthest point, strategic CSR can be taken to mean that the company ought to only attend to social or environmental problems that are strategically relevant for the firm. Yet we can also interpret strategic CSR as an argument for shaping and adapting responsibility measures connected to the company’s operations in such a way that they accord with the overriding strategic objectives. This could mean, for instance, carrying out a strategic evaluation of the types of measures one could implement in order to solve problems with the company’s stakeholders, or how to develop the message to the market regarding responsibility measures (cf. e.g., Van de Ven 2008; Jones 2012).
From CSR to CSV: Capitalism’s salvation or the emperor’s new clothes? In recent years, there has been an apparent movement towards strategic CSR in both theory and practice. By this we mean that there has been a greater degree of emphasis on the so-called ‘business case for responsibility’, which is to say that the primary rationale for responsibility is that it can benefit the business’s interests. Following this line of thought, Porter and Kramer (2011) have formulated the perspective of Creating Shared Value (CSV),** which has had quite an impact. Porter and Kramer first proposed CSV in the Harvard Business Review with the ambitious title ‘How to fix capitalism’, and have promoted this perspective as a superior solution to social and environmental problems than what CSR can offer. * **
We discuss this difference at greater length in Chapter 4. The similarity of the acronyms CSV and CSR suggests that choice of terms was not random.
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Porter and Kramer argue that CSV obviates the trade-off between responsibility and profitability (‘[m]oving’ beyond trade-offs’) in such a way that business can create value for both itself and society. In this regard, Porter and Kramer’s framework largely shares the objective of this book. According to Porter and Kramer (2011: 4), CSV similarly involves creating economic value in a way that also creates value for society by addressing the needs and challenges of society. In this way, CSV corresponds with one of the two understandings of CSR that we have discussed above – the company’s sunny side – by which we mean running the business in a way that actively tries to contribute to solving social or environmental problems. This involves the incorporation of appropriate objectives into the company’s value proposition and strategy for generating positive externalities for the environment and society. Porter and Kramer point to social entrepreneurship as an example of what they take to be shared value in practice, which emphasizes that they are referring to companies that build social or environmental objectives into their strategies. We contend, however, that CSV obscures the shadow side of corporate responsibility to a considerable degree – the idea that the company is responsible for dealing with or minimizing the negative effects of its operations. The reason is that this perspective does not take as a starting point an understanding that companies have shared responsibility for social or environmental problems that they themselves create or contribute to. Porter and Kramer (2011: 4) point out that CSV is something other than CSR, without making clear what this implies for the claim that CSV takes us ‘beyond’ the trade-off between responsibility and profitability. Thus, rather than solving the problem of the trade-off between responsibility and profitability, Porter and Kramer choose to leave this out of the picture.* They do this in spite of the fact that they write that CSV ‘presumes compliance with the law and ethical standards, as well as mitigating any harm caused by the business…’ (Porter & Kramer 2011: 15). To put it mildly, this is a very far-reaching presumption, since it is taken for granted that the company has already dealt with all of its negative externalities. Porter and Kramer thus undermine their own claim that CSV can replace CSR and they actually put forth the position that CSV is an appropriate strategy after the company has already dealt with the problems related to responsibility. *
CSV also bases itself on a straw-man image of CSR. For instance, Porter and Kramer (2011) claim that CSR arose as a way of promoting companies’ reputations and they place it on the same footing as philanthropy. This ignores a significant part of the academic and practical background of CSR as a concept and practice. Needless to say, there are several examples where responsibility initiatives have their own intrinsic value for the decision-makers who have implemented them (cf. also Chapter 4).
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The implication of CSV is that companies should identify and exploit value creation possibilities that create value for both the company and society and by doing so they will solve social and environmental problems. Companies should also contribute to solving those social and environmental issues where they are in the best position for making a difference – in a profitable way. But what about those problems where no one is in a good position to solve them? Or what about those problems where maybe no company can solve them in a profitable way, but which are nevertheless the results of business operations? Thus, if we do not operate with a notion that someone has responsibility and shared responsibility for these problems, then there is little reason to believe that something will be done about them. Porter and Kramer are silent on this point, and it is evident that CSV has not been formulated to address social and environmental problems that cannot be dealt with by companies in a profitable way. Accordingly, CSV cannot be regarded as a convincing alternative to CSR, despite its express goal to replace CSR as the guiding principle for the company’s relations with society (ibid. 2011: 16).7 It is certainly commendable to lay the groundwork so that companies can make their sunny sides even more extensive and positive. Yet there is still a need to deal with the shadowy side – companies’ social and environmental footprints – which is not necessarily profitable. Initially, Porter and Kramer recognize this, but then they unfortunately sweep it under the carpet. Instead they pave the way for a general assumption that a shared-value approach will enable enterprises to find business opportunities in social and environmental problems, which will lead to the solutions of problems (Crane et al., 2014). We claim, therefore, that we need an approach to social and environmental value creation and value destruction that captures two parallel characteristics of businesses: that they are actors that cause harm and have a responsibility for this shadow side, and also that they have an opportunity to create and share values by shedding light. The shadow side refers to the negative externalities that result from the business’s activities and the business has a certain ownership of these externalities. This involves a responsibility to those who are affected by the negative externalities. We must also attend to the light the business casts and to the shadow that results from the business’s operations, and equally so in cases where it is not necessarily profitable to carry it out. We attempt, therefore, to build further on the objective that Porter and Kramer (2011) have put forward, that is, to examine how we can move ourselves beyond the trade-off between responsibility and profitability. We believe, however, that we cannot move ourselves any further by ignoring completely the notion that businesses can have responsibility for the 57
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externalities they cause to others and they must deal with these externalities even, if seen in isolation, it is not profitable to do so. We maintain, however, that a range of positive effects can result for those businesses that actively take responsibility for the shadow side; positive effects that can far surpass the costs of implementing measures and the potential for profitability of businesses that only take responsibility out of strategic considerations.* In other words, our perspective differs from that of CSV in that we examine the implications that corporate responsibility has for business models with regard to light and shadow. CSV promotes the view that by concentrating exclusively on the positive potential of profitability, it can lead to building social and environmental objectives into the company’s value proposition. We shall discuss both how the company can actively increase the sunny side by building considerations of responsibility into the business model and how the business model can be designed so as to minimize the shadow the company casts on the social and environmental landscape.
Different approaches to responsibility: A two‑dimensional illustration In Figure 4 we illustrate different approaches to responsibility. It should be noted that we understand responsibility as both casting light and reducing shadow. We distinguish at the same time between regarding responsibility as an opportunity to increase profitability, and recognizing that the company has a responsibility for its negative effects. The four approaches in Figure 4 are not strictly distinct from each other; rather, one should regard these as ideal types that bring to the fore the most important characteristics of each approach. In the quadrant at the bottom left is traditional strategic and business-model thinking. Here, responsibility is a non-topic, and the objective is exclusively to create sustained competitive advantages in order to ensure profitability over time. This approach is thus oriented towards neither taking nor having responsibility. In the upper-left quadrant we place strategic CSR, which is built up around a ‘win-win’ mentality that claims that businesses can take responsibility as a way of creating value for the company and society as the same time. How-
*
We operate with a hypothesis that businesses that take responsibility for moral reasons have a higher probability of reaping positive consequences from their relations with stakeholders (i.e., customers, suppliers, and others), by, for example, the business’s having a better reputation owing to their being perceived as genuine in their duty to responsibility or sustainability. We shall address this further in Chapter 4.
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the book’s building blocks: business models and corporate responsibility Figure 4: Two dimensions of responsibility – and our ambition to combine these in sustainable business models
High
The company can take responsibility
CVS and strategic CSR
Responsible business models
Strategy and business models
Normative CSR
Low Low
The company has responsibility
High
ever, strategic CSR – which we claim CSV can be understood as a special case of – includes to a very limited degree the notion that companies have some kind of responsibility. We can see the opposite case in the bottom-right quadrant, where we place the traditional understanding of CSR (normative CSR). This approach is based on the idea that corporate responsibility is a result of the negative effects of its operations and that the company has a responsibility to the affected parties to minimize or in some way deal with these consequences. As mentioned earlier, we believe that the concept of corporate responsibility must encompass both understandings of responsibility. On the one hand, it concerns the responsibility the company has for its externalities, which is reflected along the horizontal axis of the model. On the other, there is the idea that responsibility can also involve the active taking of responsibility for social or environmental problems that the company has not necessarily contributed to, which the vertical axis reflects. We choose, however, to place the traditional perspectives on corporate responsibility in this quadrant because it has a fixed picture of CSR as something that is primarily limiting to companies. In the upper-right quadrant, we place our perspective, which attempts to combine the sunny and shadowy sides of the company within a business-model per59
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spective. We wish to show how companies can cast light and reduce their shadows. In other words, our goal is to create a perspective that attempts to capture the blind spots of strategic CSR, normative CSR, and strategy and business models. In this way we show how organizations can both take responsibility by incorporating social and environmental objectives into their value propositions and thus reduce or mitigate the conditions of responsibility that arise owing to the company’s operations. We also wish to show that this does not necessarily stand in opposition to making the business more competitive. In the next part of this book – ‘How to design sustainable business models?’ – we examine how sustainable business models can be formulated in practice. We begin by showing how the business identifies and understands its own business model, which is discussed in Chapter 3. Then in Chapter 4 we discuss the business that can arise from the current business model and the possibilities for attending to these issues. Following this, the company can identify the possibilities that may be encountered by dealing with other social and environmental problems that they are in a good position to solve in a profitable way. In Chapter 5 we synthesize these themes to show how companies can design sustainable business models, using a number of concrete examples.
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Notes 1
2
3 4
The story of Vålerenga recounted in this chapter is based mainly on newspaper articles and information from the club’s website. In addition we have spoken with Tamseela Afzal of Vålerenga Football. Among other sources, the club’s social-responsibility projects were mentioned in Aftenposten on March 28, 2012 and the leader in the same newspaper on 7 April 2012. The environmental profile of the planned stadium at Valle was mentioned in Dagbladet on 5 May 2008. The report on Caleb Francis is mainly based on various interviews with Francis, which are available on the Internet. Vålerenga against racism (VMR) began in 1996 with the cooperation of The Klan, the club’s supporters. The next year, Vålerenga played with VMR as the main sponsor. Later The Football Association of Norway and other Norwegian clubs partook in campaigns such as Give racism the red card. In 1999 FARE (Football Against Racism in Europe) was established, and throughout and since the 2000s both UEFA and FIFA have been involved in anti-racism work on and off the field. This paragraph is based on Anderson (2010) and Posner (2009). The criticism directed at TOMS Shoes is mostly to be found in documents from newspapers and Internet magazines. See for instance Bansal (2012) ‘Shopping for a Better World’ from www.nytimes.com and Marati, J. (2012) ‘Behind the Label: TOMS One for One Campaign’ at www.ecosalon.com.
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5
6
7
We have based our account of TOMS Shoes on Mycoskie (2011) and Brue (2012) as well as the critical articles mentioned above. Not least, this debate also deals with whether the stakeholder perspective is compatible with economic principles and relevant legislation (e.g., limited-liability laws). For instance, Jensen (2001) has claimed that the stakeholder perspective is too vague to be used for decision-making purposes. If one cannot formulate an “action rule” for corporate responsibility that is just as objective and unambiguous as ‘maximize the owners’ profits’, then we cannot take this perspective seriously, according to Jensen. At the opposite pole to this perspective, Ghoshal (2004) has taken a point of departure in classical economic theory that claims that business owners are so-called ‘residual claimants’, that is, they have right to the cash flow that is left over only when the operation’s other economic obligations have been taken care of. On this basis, Ghoshal argues that economic theory does not claim that one should maximize the shareholders’ profits. CSV has been praised as the ‘successor’ to CSR in Norway by the CEO of Ferd, Johan H. Andresen Jr. In connection with the World Economic Forum in January 2012, Andresen (@FerdOwner) tweeted: ‘We gave CSR a long overdue, but proper burial. SHARED VALUES now drive value creation.’
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