Utilizing the Business Model to Enable Sustainability Measurement on the Business Model Level

An Indicator Framework Supplementing the Business Model Canvas

Why Is Sustainability important?

Is it measurable, and if so, how?

Which role play companies? Why are their Business Models important?

How can we create sustainability, combining social, environmental and economic value, in collective actions?

These are the questions I, Lara Obst, aimed to answer in my master thesis, which was submitted in October 2015 in order to receive the M.Sc. degree of the Double Master Program “Innovation Management & Entrepreneurship” from the Technical University of Berlin and the University of Twente.

In February 2016, the thesis was awarded by the Philippe de Woot Award. This award is organized by the Antwerp Management School, on behalf of an association of Belgian universities and business schools, supported by the BASF Deloitte Elia Chair on Sustainability.

Above, the visualized summary of my thesis, in the following the Executive Summary and here the full master thesis as PDF: Lara_Obst_MA_Sustainability Framework.

Context

All-encompassing system-level changes such as climate change, resource use and inequality lead to an increasing pressure on businesses to operate in a sustainable manner. However, the Brundtlandreport’s appeal for more Sustainability in businesses does not seem to be enough to foster an economic shift towards a global sustainable development. Instead, the classic organizational focus on financial success, rather than on the integration of economic, social and environmental performance, has caused well known financial, social and environmental adversities.

Challenge

We believe that there is an imbalance between sustainability issues and business, evident from an absence of social and environmental dimensions in the recent, most popular tool for developing and testing Business Models, namely the Business Model Canvas. This tool focuses on profit first, but neglects value added to society and environment. Hence a systematic approach for the creation of Sustainability Business Models, integrating the three dimensions of sustainability, is missing. Therefore, a practical tool that integrates the knowledge of Sustainability Business Models into the general management of companies such as a standardized Key Performance Indicator (KPI) framework is absent as well.

Consequently, the lacking theoretical basis inhibits in practice the measurement of sustainability performance on the level of BMs, including all nine elements of the BMC. This lack limits the management process of identifying, evaluating and acting in a more sustainable way.

Thus, there is no tool for companies that strive to change the way they do business and aim to embed sustainability not only into their key value creation levers, but into their DNA, hence their business models (Lüdeke-Freund, 2013; Accenture & UN Global Compact, 2010; IFAC, 2011).

Solution

Applying a theory-based exploration, this thesis first reveals the desired organizational performance towards “strong” sustainability. Therefore, it investigates the emerging, trans-disciplinary research field around Sustainability Business Models.

It was found that the Business Model represents the core logic of a company, but currently lacks in its conceptual model, the Business Model Canvas, sustainability issues. “Strong” sustainability is thereby defined as a balanced triangle of non-substitutable economic, social and environmental values. Thus, the proposition of a balanced set of Sustainability Performance Indicators (SPIs), measuring all three sustainability dimensions, was developed.

Secondly, in an empiric exploration, these SPIs, used by different Sustainability Reporting (SR) guidelines, were further investigated and altered together with 20 experts in three Delphi panel rounds.

As a result, a SPI Framework, supplementing the Business Model Canvas, was built. The framework depicts and visualizes the current (with lagging indicators) as well as potential (with leading indicators) sustainability performance of companies. Hence it enables the measurement of sustainability performance on the BM level and not only on the product or service level, as conventional Corporate Sustainability tools do.

Research Approach

The SPI Framework is developed as practical management tool that integrates the knowledge of Sustainability Business Models into the general management of companies, using standardized Key Performance Indicators (KPIs) as well as individual Performance Indicators (PIs) (Kaplan & Norton, 1996). This comprehensive indicator set enables the measurement of sustainability performance on the business models level (OECD, 2004; Schaltegger & Wagner, 2006; Accenture & UN Global Compact, 2010), including all nine elements of the Business Model Canvas. Hence companies can use the framework to identify, measure and evaluate their sustainability performance.

Regarding the challenge of how companies can be more sustainable, it is advised to investigate how the use of Business Models as a management tool can be guided, including the “development of performance measurement systems and instruments that help in qualifying and quantifying companies’ sustainability performance on the business model level” (Lüdeke-Freund, 2013, p. 36).

Building on this request, the following research question (RQ) and two sub research questions (SRQs) were developed.

  • RQ: What are the relevant indicators essential to measure sustainability performance on the business model level?
    • SRQ1: Which indicators are discussed as most relevant in the sustainability-oriented research field connected to sustainability business models?
    • SRQ2: Which sustainability indicators do experts from practice use to assess the sustainability performance of businesses?

In order to investigate the RQ and the SRQs, various methods were used: literature review, data collection in a database, expert interviews and framework development. The questions are answered in different chapters and lead from theory (SRQ1 in chapter 1: concept of “business model” and “sustainability”) to practice (SRQ 2 in chapter 2: framework with indicators from practice) and finally to the framework development and evaluation (RQ in chapter 3: results).

Result: A Business Model SPI Framework

The Delphi panel (Dalkey et al., 1969; Rand Corporation, 2015) identified 15 standardized key SPIs and 23 additional PIs, which can be applied to fit individual business models. In order to build the SPI framework, only the key SPIs, including three social (SO), four environmental (EN), three economic (EC) and five standard disclosure (SD) indictors, were mapped and visualized in the Business Model Canvas, as shown in Figure 1.

SBM_SPI1

Figure 1: SPI framework with 15 Key SPIs.

This way, a SPI framework was created that contains the following indicators in each Business Model element (Table 1).

SBM_SPI2

Table 1: Key SPIs (code and short name) mapped to the BMC elements.

Each key SPI indicates, in one or more business model elements, specific impacts, actions or efforts of an organization that are necessary to measure the total sustainability performance on the business model level. The four most relevant key SPIs are shown explanatory in the following.

SO5 – “safety and security” measures in the business model element “key resources”, whether an organization has systems and policies in place to monitor, evaluate and ensure worker safety, including the guarantee for social security protection.

EN7 – “reputation and transparency” uncovers in the three business model elements “value proposition”, “customer relationships” and “channels”, the activities taken to transparently disclose the company’s environmental impact.

EC3 – “SROI” asks to calculate for the “value proposition” and the “revenue” business model element the SROI ratio.

SD5 – “value creation statement” is essential, in order to disclose in the “value proposition” business model element, the overall value creation process of the company, with regard to where the organization creates, retains or destroys value in economic, social and environmental terms.

In addition to the 15 Key SPIs, it is advised to use the PI set ancillary, in order to comprehensively measure an organization’s individual sustainability performance, fitting to its specific business model.

Contribution

The developed framework enables practitioners – such as small and medium sized enterprises (SMEs) and start-ups – to identify and measure their sustainability performance in the early stages. In addition, it enables them to seamlessly report their sustainability performance in later stages, as the SPI framework is based on the Global Reporting Initiative (GRI) SR standard and the Impact Reporting and Investment Standard (IRIS) metric set.

Stakeholders, as the local community, the government or investors, can use the framework to understand and compare the sustainability impact of organizations.

Moreover, as the framework supplements the BMC and is compatible with the Balanced Scorecard (BSC), it facilitates a fluent transfer between strategy and BM. Hence it supports the easy integration of sustainability strategies into the core logic of companies and thus into the general management objectives.

For any further questions, please contact me.

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