Section II: The Crux of Sustainability-Driven Profit: Business-Model Innovation

To gain a deeper understanding of sustainability innovation, we presented survey respondents with the business model framework described above, which was developed by The Boston Consulting Group. (See “A Framework for Analyzing Business Models.”) Using this framework, we asked respondents how (if at all) they have changed their business model. We found that up to 59% of respondents whose companies changed three or four business model elements report profit from sustainability efforts.

A Framework for Analyzing Business Models


View Exhibit

In short, Sustainability-Driven Innovators pursue innovation aggressively across their business models — much more so than companies that don’t achieve profits from sustainability efforts.

The Potent Combination

A surprising combination of business model elements delivered the most potent results. They weren’t the game-changing products and businesses that one usually hears in the context of innovation. Sustainability-Driven Innovators often take a more straightforward route, combining target segments with value-chain innovations. Nearly 60% of organizations that pull these two levers and change one or two other business model elements are more likely to be Sustainability-Driven Innovators. (See “The Extent of Business Model Change.”) Pulling both allows companies to target new segments and/or better serve the segments where they currently compete. Value-chain innovations help companies realize innovations in these segments.

Kraft Foods is a perfect example. (In October 2012, Kraft Foods changed its name to Mondelez International.) Sustainable sourcing in its value chain is a key part of the company’s strategy, according to Chris McGrath, then vice president for sustainability. In addition to protecting the environment and helping farmworkers improve their livelihoods, models such as Rainforest Alliance, Fair Trade and UTZ Certified help boost crop yields and capacity — a critical need for a global food company dependent on reliable access to commodities. Last year alone, Kraft increased its sustainable sourcing of agricultural commodities by 36%. Currently, more than 15 of its brands carry the Fair Trade or Rainforest Alliance marks.

The Extent of Business Model Change

View Exhibit

The Extent of Business Model Change

Fifty percent of our survey respondents who have changed three or four business model elements say they profit from their sustainability activities, compared to only 37% of those who changed only one element of their business model.

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References

1. PepsiCo, "Purpose," n.d., www.pepsico.com.

2. There are many business model frameworks to choose from. See, for example, H. Chesbrough, "Open Business Models: How to Thrive in the New Innovation Landscape" (Boston: Harvard Business Press, 2006); M.W. Johnson, C.M. Christensen and H. Kagermann, "Reinventing Your Business Model," Harvard Business Review 86, no. 12 (December 2008): 50-59; A. Osterwalder and Y. Pigneur, "Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers" (Hoboken, New Jersey: John Wiley and Sons, 2010); P. Lindgren, R. Jørgensen, Y. Taran and K.F. Saghaug, "Deliverable D 4.1 Baseline for Networked Innovation Models," NEFFICS Consortium, 2011; R. Amit and C. Zott, "Creating Value Through Business Model Innovation," MIT Sloan Management Review 53, no. 3 (spring 2012): 41-49; and Z. Lindgardt, M. Reeves, G. Stalk and M. Deimler, "Business Model Innovation: When the Game Gets Tough, Change the Game," Boston Consulting Group, December 2009.

3. N. Kruschwitz, "Why Kraft Foods Cares About Fair Trade Chocolate," MIT Sloan Management Review, September 12, 2012, http://sloanreview.mit.edu/feature/why-kraft-foods-cares-about-fair-trade-chocolate/.

4. L. Brokaw, "Marks and Spencer's Emerging Business Case for Sustainability," MIT Sloan Management Review, July 13, 2012, http://sloanreview.mit.edu.

5. Regulators, NGOs and the media are not driving the focus for Sustainability-Driven Innovators. However, our study found that companies less successful at sustainability business-model innovation are 25% more likely to be influenced by legislative and political pressures than Sustainability-Driven Innovators are, and 72% more likely to be driven by the need to maintain operating licenses.

6. N. Kruschwitz, "New Ways to Engage Employees, Suppliers and Competitors in CSR," MIT Sloan Management Review, November 14, 2012, http://sloanreview.mit.edu.

7. Some recent research using highly rigorous randomized field experiments shows that people are willing to pay premiums. See J. Hainmueller and M. J. Hiscox, "Buying Green? Field Experimental Tests of Consumer Support for Environmentalism," http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2062429.

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