Firms are the most effective instruments of alchemy humans have ever envisaged: they pool together a variety of resources and turn them into consumables, livelihoods and profit. The aim of this blog is to discuss how we could recalibrate those instruments to function not only as sources of human-sized material wealth but also as preservers of the life-sustaining planetary processes, biodiversity.
Funnily enough, the more ubiquitous and self-evident something is, the more difficult it becomes to pin it down into a short description. A firm can be viewed as a set of contracts, a constellation of resources, an economic profit seeking entity or an organization to name but a few perspectives. It is a home-base for innovation, a cyborg-like factory of production, an arena for human achievement and social identity creation, a slaver and a liberator – a node where things come together to transform and move on.
While it is somewhat futile to try to capture what a firm is, it is quite useful to explore what it does. Visions, missions and strategies may describe the actions or remain pretty words on beautiful slides, but more often than not they constitute retrospective rationalizations aimed at trying to make sense of the ongoing complexity of bundling together resources and expectations. However, there is one thing no firm functions without, regardless of whether it is written down deliberately or merely acted upon.
At the heart of every firm there is one or several business models that define what the firm does. Therefore, to become genuinely sustainable, a firm needs to ground their operations on genuinely sustainable business models.
Business model 101
While there are several ways of explaining what a business model in turn is (and popular canvases to help one design fancy new ones), ultimately every business model consists of four elements: value proposal, value creation, value capture and value distribution.
Value proposal spells out an identified (or created) need that the offering is set out to satisfy. For a maker of hammers, the value proposition consists of identifying the need of people to hang things on nails to the wall and the promise of delivering tools to fill that need. For the maker of trendy clothes, the value proposition consists of contributing to the desire of people to express themselves through clothing, offering an image of what kind of message wearing their clothes provides, and promising the wearing of their clothes to endow the wearer with the appropriate message. For the physiotherapist, the value proposal entails relieving the customer of aches and pains.
Value proposals can target tangible, apparent needs (hunger) or intangible, less acknowledged needs (I want to look young and pretty). In the early days of the firm, most needs were genuinely identified, whereas with the rise of marketing and its insights into human psychology, currently many of the needs companies aim to fulfill, are artificially created by the companies seeking to fulfil them.
Value creation is the production of the offering aimed at satisfying the need spelled out in the value proposal. It’s about harvesting the materials, recruiting and employing the people, having the production facilities, designing the services, or gaining expertise to carry out the promised, intangible offerings. Value creation is the activity that requires the organization, the factory or at the very least, the ability of the individual web site designer to actually come up with the promised website.
Value creation is also the part of business where the environmental impacts materialize. Depending on the offering being created, they can be vast and complex, materializing through global supply chains far away from the headquarters, or minute, like switching on a computer. While the largest part of operations, in terms of the business model, value creation is the simplest to grasp.
Value capture is the mechanism that dictates how the firm is compensated for the offering satisfying the need. In short, this is where the income comes in. While the groundwork for answering the question “Why would anyone pay us for this?” has been laid out in identifying the targeted need in the value proposal, in value capture the mechanism of payment is distilled into practicalities, answering also “How and how much should we be paid for this?”
Does the compensation happen through sales or rent? Maybe licensing would work, or possibly freemium, or a monthly fee. Does the firm emphasize selling an item or offering its benefits as a service – should KONE sell elevators or the numbers of lifts a set entity is expected to deliver throughout its life cycle? What is the basis for pricing: a traditional cost plus profits, or maybe a premium built on the finessed value proposal promising youth and beauty?
Value distribution includes the decisions made about the uses of the income. What proportion of the income is necessary for covering the costs, and what is the attitude towards them – is cost effectiveness the king, or is the firm open to paying more for sustainable sourcing, for example? At what level are the salaries set? What is the proportion of income fed back into operations through improvements and investments? How much should be reserved for the top management? And of course, what is the expected profit harvested by the owners and investors?
While value distribution comes after the other elements of the business model have been carried out, the choices made regarding it align preceding activities. The value distribution choices are an inescapable testimony of the genuine values and priorities of the firm: if the company values its employees or the sustainability of its supply chain, it is visible in its value distribution choices.
Let’s be honest. We’ve known, at least from the 1970’s, that the relationship between business and natural environment is untenable. Time and again, research and practical experience has shown that fundamentally, companies profit by transforming parts of the living planet into dead money. In the short term, this has benefitted a notable chunk of humanity, as the economic growth has turned into better nourishment, ease of living and unparalleled safety from sickness, bloody revolutions and war historically pestering humans.
In the long term though, we’re now beginning to see the detailed price tag. Ripping out parts of the human life-sustaining processes of our Spaceship Earth will eventually result in destroying those processes. That makes the life of us space-faring apes, aboard this only lump of rock we’ve so far access to, somewhat less pleasant.
However, despite this accumulating and uncontradictory knowledge, those negative impacts have only been increasing. In 2015, Dyllick and Muff took this particular bull by the horns, and focused in on this discrepancy, pondering how a genuinely sustainable firm could look like. They came up with a matrix where firm sustainability was categorized into four types.
Business-As-Usual firms wreak havoc with little concern but their economic profits, whereas Sustainability 1.0 firms have heard about the need for companies to adhere to at least to the minimum regulations regarding the environmental sustainability and social justice. The Sustainability 1.0 firms view sustainability as a chore, a nagging add-on that has to be mentioned in order for the firms to be free to pursue business – green- and whitewashing are not unheard of. In both BAU and Sustainability 1.0. firms are seen as functioning within an economic bubble decoupled from the rest of the society and the planet: all they need to focus on is business and profit, as everything beyond that are mere externalities.
The firms in the Sustainability 2.0 take the issues more seriously, engaging in triple bottom line thinking: in addition to the profit, they seek to take people and planet into consideration. However, the primary aim of the business is still to do more profitable business – however with the ambition of doing so within the planetary boundaries where possible. In Sustainability 2.0, firms are still considered as separate entities from the rest of the society and the planetary processes, however with as understanding of some linkages between for example their resource sourcing and environmental issues. Many Sustainability 2.0. firms engage in philanthropy and diverse campaigns, sometimes even within the field in which they operate, but more often than not finding popular causes they can support outside their own spheres of operation.
To reach Sustainability 3.0 and become what Dyllick and Muff dub as genuinely sustainable firms, the firms need to flip their priorities in a more fundamental way. A Sustainability 3.0 firm employs systemic thinking and understands their embeddedness: firms do not exist in an economic vacuum, but are a part of the human social systems, which in turn are a part of the natural systems encompassing the whole globe. This leads to a radical rearrangement of priorities: instead of profit being the star aligning all firm activities, the raison d’être for the firms is the contribution they can make to benefit the societies and the environment. Instead of profit as the goal and the business operations as the means, Sustainability 3.0 firms view their societal and environmental contributions as the goal and the profit as the means necessary for being able to deliver those contributions.
Sustainability 3.0 firms and the grand reshuffling of priorities
Every now and then someone wakes up to wonder the wisdom of having a gambling monopoly that argues for its right of existence through pointing out the work they do for combatting gambling addiction. The argument goes that as people are any way wont to gamble, and should have the freedom to make their own (bad) choices, why not make the most of the bad situation and use the income for something good? Trying to eradicate gambling would only lead to illegal actions, as few things stand between humans and their ingenuity in finding the loopholes to pursue their preferred vices.
Similar logic is employed in fast food, fast fashion or fast cars: yes, we know they are bad for the nature, but as people want them, why shouldn’t we give them what they want, and then use the income in sustainability campaigns? After all, that also creates profit and economic growth, something we’ve learned to equal with progress.
The problem with the aforementioned logic is captured in an old Finnish folk tale. Once upon a time, there was a village of fools, where someone was suffering from cold toes as their blanket was too short. At the same time, the blanket came up to the nose, so the solution seemed obvious: they cut off a part of the top of the blanket and sewed it on to the bottom of the blanket. As the first time this failed to solve the problem, they kept cutting and sewing, with each repetition making the blanket a little bit shorter altogether as there was always some loss of material in the cutting.
Despite their potential best intentions, the environmental campaigns and actions of the Sustainability 1.0 and 2.0 firms consist of stitching back a few threads left over from having made a bigger cut on the natural resources. The blanket, in other words the life-sustaining biodiversity, just keeps getting shorter, i.e. less sustainable. Just like the fools remain happy as they seem to be fixing the problem, so too are the firms and their customers happy, as it seems that the customers can go on having their fast foods, fashion and cars as the companies give back to nature a portion of what was destroyed in the acts of production.
The fundamental difference in Sustainability 3.0 thinking emerges from asking the question: “If the thing we’re doing is harmful, shouldn’t we be doing something else?” Should we enable gambling at all, or maybe use the resources to figure out in what more beneficial ways could people use their time and money? Instead of spending vast resources to deliberately promote fast food, fashion and cars, could we use those resources in figuring out how to fill the needs of people in a planetarily sustainable way? Instead of cutting and stitching, how about the fools go and get knitting a longer blanket?
Genuinely sustainable business models
The thing to remember when putting together a Sustainability 3.0 business model is the fact that money has no inherent value. Instead, it is an instrument, useful in exchanging one thing of inherent value (like labor) with another (like food). Subsequently, profits in themselves cannot be a meaningful goal, as they consist of instruments and hold no inherent value. The value of profits emerges only through their use or exchange – what genuinely valuable things or actions do they enable?
To begin with the value proposal, a genuinely sustainable business model starts from identifying a genuine social or environmental need. There is an abundance of them even when we remove the artificially created needs exploiting the baser human desires of sloth, lust and vanity. When we in turn draw from the equally human needs of meaningfulness, kindness, belonging and protectiveness, we find a wealth of needs left unsatisfied in our materially abundant western societies. On top of those, there are a number of practical challenges relating to providing food, energy and shelter in ways that allow both the survival of the life-sustaining processes of our planet and the increasing number of us apes inhabiting it. There is no shortage of genuine human and planetary needs even if we remove artificially promoted ones.
Waste management firms trump fashion industry. Car-sharing applications outshine electric vehicle production. Farming oats directly for human consumption is better than raising cattle. No firm wants to be in the service of evil in terms of promoting environmental calamities, but unfortunately many are. Acknowledging the link between the core value proposal of the firm and its environmental footprint can be painful, but it is a pill that has to be swallowed if we want to remake our economy into something that can function within the planetary boundaries. Alternatively, we should pool all our resources into finding new planets to inhabit.
For a long time, we’ve been taught to think that economic ends justify any means. In genuinely sustainable business models, value creation is executed in ways where the effects of those means are immediately considered and internalized. Put another way, the production of the offerings cannot exploit or destroy nature – it has to operate strictly on a no-net loss, or even regenerative principle. No economic ends justify environmentally destructive or socially unjust means.
However, while the principle is iron clad, the practice of following that is all but simply achieved. Parceling out production into deep and wide supply chains has blurred the understanding of the environmental impacts of myriad firms not directly related to sourcing raw materials. Few firms even know their overall environmental footprint, with the ignorance being sanctioned by the current rules of the game. There are two routes: one is to strive towards shorter and simpler supply chains where the transparency regarding the environmental and social impacts is easier, and the second is to regulate each stage separately. The former enables the firms to shoulder their responsibility whereas the latter tends towards outsourcing the responsibility to policy makers.
The changes in the value capture are less fundamental. The selection of payment mechanism remains diverse, with maybe emphasis on two newer options. More radically, promoting barter options might cut down some of such operations that contribute little but to muddy the waters in pursuing understanding of the genuine environmental impacts of a given business action. In turn, the current increase in as-a-service options might promote sharing economy, diminishing the need of producing excess items. When one can pay for the kilometers instead of the car, ten families might make do with one car, instead of there being pressure to manufacture cars for each family.
One of the biggest mental shifts necessary for executing a genuinely sustainable business model concerns value distribution. Instead of aligning all business operations towards maximizing owner profits, the distribution of income has to align with the overarching contribution goals of the firm. This does not mean neglecting owners altogether, but it does mean radical rethink of what is a fair compensation for carrying ownership risk. While this applies equally to small and big companies, most crucially this concerns shareholder owned major multinational companies where the shareholders don’t honestly bear any responsibility of the firm actions.
The income distribution priorities should be as follows: first, whatever is necessary for value creation in a genuinely sustainable way should be directed to that end. No sourcing cheaper unsustainable resources, but fair compensation for sustainable alternatives. This applies also to salaries – laboring to contribute to the beneficial aims of the company should be fairly compensated. As one of the reasons for the firms to exist is to be the means through which a day’s non-farming labor can be turned into sustenance, employee wellbeing should be more important than allowing for the rich owners to become richer.
Secondly, the aim of the firm should be to grow its beneficial impacts. The more income there is, the more possibilities there are for the firm to make a difference. Growth is not an end onto itself, but doing more good is.
Only last should the profits be shared with owners, and even there with a distinction. An entrepreneur shouldering the whole responsibility of the firm’s actions should be rewarded proportionally more than an anonymous shareholder with no other skin in the game than an automated purchase of stocks via an investor AI.
Bitter pills or tasty possibilities?
It is certain that the way we’ve organized our economy will change due to the environmental impacts of our current way. There are two options as to how this may happen: either we continue operating under the same principles as we’ve done since the 18th century and see the system come crashing down, or we begin changing those principles and take the driver’s seat in the oncoming transformation.
The good news is that whatever we humans have made, we can also remake. The capitalist, growth-based economic system we now take for granted is but one option, and a mere few centuries old – humanity has undergone bigger changes in its history than the remodeling of one economic system. Each system envisaged also teaches us something: we should learn from both the benefits of capitalism and its pitfalls as we go about reinventing economy.
We can keep the mechanisms that have created material security, health benefits and life easing innovations, but ditch the excesses that merely prey on our insecurities and promote our feelings of inadequacy. We have now tested whether material wealth equals general happiness, and have received our answer in the statistics highlighting depression as a national illness in many western countries. This means, that not only is there a need for acknowledging the planetary boundaries within which we may survive in the first place, but there is also room for innovation that makes us humans feel better.
We humans like to stick to doing things the way we’ve always done them. At the same time, we are far more enduring than cockroaches, and seem to bounce back from inconceivable calamities. The trickiest thing by far, alas, is to engage in controlled transformation. Firms, with their resources and operational excellence are now at the forefront of making this happen, of imagining and then realizing such business that bodes better for both us people and our home, the planet.
Dr. Milla Unkila, Head of Interaction and Communications @BIODIFUL, Senior Researcher @University of Turku School of Economics