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Sustainability
How to make money on sustainability
Unpacking how a company creates value is crucial to reap the rewards of sustainable transformation, say Knut Haanaes, Øystein Fjeldstad, and Bryony Jansen-van Tuyll.
As business executives, strategists, and decision-makers, you can play a pivotal role in integrating sustainability into business strategies. We see two major obstacles for those wishing to do this. The first is the hurdle of getting from awareness to action, and the second is the struggle to improve profitability through sustainability.
By understanding the different models through which businesses generate value, however, you can tailor your sustainability strategy to address environmental or societal issues while also generating economic returns.
The business model of product-based companies is built on transforming inputs into outputs that customers are willing to pay for.
Engaging in sustainability efforts by building on value-creation models
We differentiate four broad types of value creation models: value chains, value shops, value access, and value networks. Each of these is driven by distinct economics and has its own unique opportunities to engage in sustainability efforts. What we find is that sustainability is not just about mitigating negative impacts; it presents opportunities for increasing value.
Let us unpack the four fundamentally different ways companies create value to understand how they can best generate income while supporting environmental efforts:
1 – Value chain companies, creating value through ‘product economics’
The business model of product-based companies is built on transforming inputs into outputs that customers are willing to pay for. As Michael Porter pointed out, these businesses create value by developing innovative products, efficient operations and logistics, robust marketing strategies, and optimal service. They must continuously adapt to evolving customer needs on product, price, distribution, and messaging to stay relevant, underlining the urgency of staying in tune with customer demands.
Regarding sustainability, companies developing and selling products often have a more visible environmental footprint than other companies. This means they usually get significant societal pressure to take responsibility for their emissions and waste. These firms, however, also possess considerable potential to contribute to a sustainable future.
Whether making many small products or managing large custom infrastructure projects, product-focused companies rely on materials, designs, and suppliers. These are also the levers through which they can have the most impact. They can explore using novel, less wasteful materials, conceptualize new, more sustainable products, and develop more efficient and cleaner production methods and systems. The circular economy concept offers companies in this category a compelling opportunity to devise more repairable, re-manufacturable, and recyclable products, minimizing waste. It can also inspire the development of new services and systems with smaller material footprints and more significant environmental benefits.
Let’s consider Trane Technologies, which develops heating and cooling equipment for homes, buildings, and transportation. Alongside ambitious goals for reducing emissions, waste, and water use in its production processes, it also addresses the emissions generated by its products by adopting circular design principles, developing more efficient equipment and electrification, and integrating ways to reclaim refrigerants. This sustainability lens has led to new business opportunities, such as expanding its offering of cooling systems for food transport and helping to reduce food waste.
Patagonia, a global outdoor brand selling clothing, bags, gear, and food, is a company continuously improving its business to align with environmental goals. As a product-economics company, the focus is on reducing the footprint of its products and materials. Patagonia works with supply chain partners to source organic or regeneratively grown cotton, to seek alternatives to fossil-based materials, or, where not yet feasible, to use recycled alternatives. As part of efforts to move away from harmful ‘forever chemicals,’ such as PFAS, for coatings, the company has funded years of research, becoming a forerunner in adopting alternatives. Beyond these initiatives at the product level, the company has also added services such as free repairs for life. As well as benefiting the environment, this reinforces the company’s reputation for product quality and reliability.
These companies, and others like them, recognize that, as product-centric businesses, they rely on innovation, materials, and supply chains. To develop more environmentally friendly products and processes, they must leverage their internal expertise and creativity and work in tandem with value chain partners. A sustainability focus can inspire them not only to develop new, innovative products and services but also to reduce waste, enhance efficiency, and build relationships with their suppliers and customers.
“Problem-solving companies possess a unique advantage regarding sustainability.”
2 – Value shops, creating value through ‘knowledge economics’
In his work on problem-solving, Nobel laureate Herbert Simon laid out how decisions require acquiring relevant knowledge about a problem to design solutions. Lawyers, consultants, architects, and design agencies help their customers solve complex problems by supporting them in analyzing situations, crafting innovative solutions, and making difficult decisions. Some provide value through their expertise as generalists, leveraging broad experience working with different types of customers, while others specialize in particular topics.
Problem-solving companies possess a unique advantage regarding sustainability. They benefit from cross-category and cross-value chain knowledge, experience, data, and research capabilities, which can be harnessed to assist clients in solving intricate sustainability challenges.
Some companies in this category focus entirely on supporting customers to become more sustainable, such as sustainability ratings provider EcoVadis. It analyzes a business’s environmental, social, and ethical performance and supply chain and identifies strengths and areas for improvement, providing benchmarks to compare performance with peers. Working across industries, EcoVadis continuously collects data on relevant topics such as working conditions, energy use, emissions, pollution, and waste. This unique knowledge base offers value to companies not equipped to collect such specific information across their supply chains.
Today, most management consulting firms, including big names such as EY, BCG, and McKinsey, have practices focused on sustainability and climate change. They can leverage their experience working across different sectors to support customers in addressing sustainability challenges, improving value chain systems, capturing opportunities, and deciding which route to take. They strive to be at the forefront of knowledge about energy systems, technology developments, and novel business models. Similarly, law firms and accounting companies can help their customers navigate the complex world of regulations worldwide and sustainability accounting.
By integrating sustainability into their core offering, these professional service firms drive positive change and position themselves as indispensable partners for businesses seeking to build a more sustainable future. As sustainability becomes an increasingly important pillar for their customers, it will be crucial for these companies to nurture and stay ahead in knowledge and expertise.
3 – Value access companies, creating value through ‘sharing economics’
Firms such as HR management firms, electricity providers, car leasing companies, and IT service businesses create value by managing shared assets and offering them as a service. These companies exist because of what economists Ronald Coase and Oliver Williamson coined “transaction cost economics”. By leveraging economies of scale and continuously providing reliable, high-quality, and up-to-date services, they help their customers save time and money while reducing risks related to doing these activities in-house.
Companies that offer shared services to broad customer bases possess substantial potential to help their customers lower their environmental footprint. Their platforms empower customers to access resources collectively rather than individually purchasing them. By choosing durable products, prioritizing service quality, and leveraging their extensive customer reach, these companies can spearhead sustainability initiatives with far-reaching benefits.
For example, building services firm Johnson Controls leverages its expertise in technology and sustainability to provide a diverse clientele with solutions that enhance building safety and energy efficiency. The company develops, installs, and services heating, air conditioning, industrial refrigeration, and ventilation systems and building management, fire, and security systems for commercial and residential buildings. Given that buildings contribute approximately 40% of global greenhouse emissions, Johnson Controls acts as an ally for companies seeking to reduce the environmental impact of their managed properties, whether they are residential complexes, data centers, hospitals, or sports stadiums.
Trove is a young company that contributes to circularity in the fashion sector by providing white-label resale platforms and assisting brands in establishing trade-in and resale programs. Its digital solutions streamline product returns, facilitate pricing and listing of second-hand items, present these products attractively and informatively, and monitor sales. Trove supports customers in setting up software, ensuring the platform runs smoothly, and facilitating logistics through its facilities where needed. Although not known to most shoppers, Trove is the company powering the Allbirds ReRun, Lululemon LikeNew, and Levi’s SecondHand platforms, allowing these companies to provide additional services to their customers in turn.
By leveraging their extensive reach and influence, service providers can minimize customer transaction costs while supporting customers in adopting sustainable practices, generating significant impact at both local and global levels. These companies play a pivotal role in societal transitions, encouraging efficiency through bundled services and promoting usage-based models over ownership.
4 – Value networks, creating value through ‘network economics’
Companies in this category create value by connecting people, places, and things. Internet providers and gaming platforms, for example, connect individuals. Insurance companies, banks, and other financial firms connect investors with those seeking funding. Rail companies and airlines connect people with places, and telecommunication platforms connect people. The value these companies provide is linked to the quality and breadth of their network. As Michael L Katz and Carl Shapiro describe in their work on network externalities, the value of the offering increases as the network expands.
Networks have become like the veins of modern society, facilitating the flow of information, resources, finances, products, and people. Companies that derive value from networks are crucial in enabling the systems we rely on, including transportation, banking, insurance, energy, and digital communications. Due to their infrastructure and extensive stakeholder networks, these companies can take a multifaceted approach to sustainability. Like other companies, they can enhance the environmental sustainability of their operations, but beyond that, they can leverage their central position in the network to influence and support various stakeholders. As such, they can reshape their networks and flows to drive transformative sustainability initiatives.
In 2022, the former mining company Umicore rebranded itself as a circular materials technology company, harnessing its network to power the circular economy movement. Collaborating with partners, Umicore collects, recycles, refines, and transforms parts and materials into new products to resell to other manufacturers. Through these interconnected activities, particularly for critical metals and rare earth materials, Umicore is central to fostering a circular economy, helping companies reduce their environmental footprint and enhance product sustainability.
Through its AirView project, Google outfits street view vehicles with air pollution sensors to gather hyper-local air quality data. This data aids governments in city planning decisions. Furthermore, using satellite data, Google provides the public with information on natural disasters like floods and forest fires. By leveraging its vast data collection and AI tools, Google has developed offerings that meet sustainability challenges and connect with a broader range of stakeholders, including relief organizations and governments, to develop climate change mitigation and adaptation strategies.
These companies recognize that the value of their network lies in their infrastructure, the flows they enable, and the stakeholders they can connect with. To address sustainability, they must understand the value they can bring to society and seek ways to harness that value for social and environmental innovation.
There is an intensifying need for knowledge and expertise to support companies, governments, and industries in their transition.
How can your business create value through the lens of sustainability?
With climate change and environmental challenges pressing, integrating sustainability into business models is both necessary and an opportunity. There is a growing demand for more efficient, circular products. There is an intensifying need for knowledge and expertise to support companies, governments, and industries in their transition. More platforms are required to help address shared challenges and minimize resources while providing flexibility. Networks can provide immense value by enabling knowledge sharing, better energy and material flows, and collaboration for mutual benefit.
Here are five steps that executives can take to develop effective sustainability strategies aligned with their organization’s business model:
- Identify the business models through which your company creates value. Are you developing smaller or larger mass or custom products? Are you helping customers by providing knowledge and solving problems? Are you providing services through sharing economics? Or are you enabling the flow of goods, finances, or people?
- Determine the commercial drivers in sustainability. When working on products, consider your materials, designs, and suppliers. If you are a knowledge provider, your levers are knowledge and people. For companies providing shared access to resources, it is critical to reach many customers and for them to be aware of the benefits of shared resources over products. Network companies will be able to have the most impact by addressing the flows they enable and the infrastructure they rely on.
- Identify where you have the most substantial commercial impact. Do you want to lower your environmental footprint or develop products and services to address societal challenges? Explore relevant ways to improve your product designs, upskill your workforce, raise awareness, or redesign your network flows.
- Seek out collaboration partners. The sustainability challenges we face require multifaceted solutions. Whatever your business model, partners will be necessary to develop better products, services, and systems. These partners can be suppliers, customers, outside experts, governments, non-governmental organizations, or competitors.
- Identify opportunities for developing new systems to maximize impact. As you gain more clarity about your sustainability goals, opportunities will arise to have a more significant effect – which could mean adopting new business models. Traditional product companies might move into resource sharing or leverage their built-up skills to provide consulting services. Likewise, sharing companies might develop sustainable products to serve their customers better.
As societal awareness grows, aligning with sustainability isn’t just a choice; it’s a wise – and necessary – business decision. Reflecting upon how your business creates value today is a first step on the journey. Whatever your route, there are plentiful opportunities to have a positive impact.
Companies creating value through…
| Dependent on: | Can make money in the following ways:
| |
Product economics – the value chain | Materials, design & suppliers |
| |
Knowledge economics – the value shop | Knowledge & people |
| |
Sharing economics – the value access | Reach & awareness |
| |
Network economics – the value of the network |
| Infrastructure & flows |
|
Authors
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