Making the finite infinite

Making the finite infinite

Investigating the sustainability of result-oriented services

Date: June 27, 2016

Author: Maud van den Eijnde Student number: 10764437 Bachelor: Future Planet Studies

Educational institution: University of Amsterdam Mentor: Willem Dorresteijn

Statement of Originality

This document is written by Student Maud van den Eijnde who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Acknowledgement

First, I would like to thank Willem Dorresteijn for his supervision and support. His critical view and feedback helped me to achieve my goals and clarify my topic in a short period of time. Further I would like to thank all my study participants for their input and time in discussions about my thesis. Additionally, I am extremely grateful to Dorus Galama and Judith Voermans for letting me interview them. Their enthusiasm made the execution of my thesis a learning and interesting experience. Another thanks goes out to University of Amsterdam and especially Bachelor Future Planet Studies for assigning the mindset of being able to look at problems from all possible perspectives.

Abstract

Although result-oriented services (RS) is advocated as one strategy to achieve circular economy, limited research focuses on the sustainability aspect of RS in terms of ecological and social protection. To explain to what extent the business model of RS is sustainable, the research will check if the RS business model meets the requirements of the sustainable business model. The elements of both business models are value proposition, customer interface, supply chain and financial model. The RS business model is sustainable if the value proposition includes ecological and social value besides economic value, the customer interface includes responsible users, the supply chain includes responsible acting suppliers and the financial model includes costs of ecological and social impact. In order to check the sustainability, four practical examples of RS business models (Mud Jeans, Philips Lighting, Gerrard Street and Canon) are analysed by means of desk- and field research. The RS business model is sustainable in terms of ecological value proposition and supply chain and unsustainable in terms of customer interface and financial model. The social value proposition is sustainable but not because of RS implementation. Additionally, a business model of RS with the presence of economies of scale, a longer business existence and experience and a business-to-business trade may have more potential to achieve a high extent of sustainability.

Table of content

1. Introduction ... 8

2. Literature review ... 10

2.1 Services and PSS ... 10

2.2 Result-oriented services ... 11

2.3 Illustration business model RS ... 11

2.3.1 General business model ... 12

2.3.2 Value proposition RS ... 12

2.3.3 Customer interface RS ... 12

2.3.4 Supply chain RS ... 13

2.3.5 Financial model RS ... 14

2.4 Sustainable business model ... 14

2.5 Conceptual model ... 15

3. Methodology ... 16

3.1 Research strategy ... 16

3.2 Research method ... 16

3.2.1 Desk research ... 16

3.2.2 Field research ... 17

4. Results ... 18

4.1 Mud Jeans – Wearing jeans as service ... 18

4.1.1 Value proposition ... 18

4.1.2 Customer interface ... 19

4.1.3 Supply chain ... 19

4.1.4 Financial model ... 20

4.1.5 Conclusion ... 20

4.2 Philips Lighting – Light as service ... 21

4.2.1 Value proposition ... 21

4.2.2 Customer interface ... 22

4.2.3 Supply chain ... 22

4.2.4 Financial model ... 22

4.2.5 Conclusion ... 23

4.3 Gerrard Street - Listening music as service ... 23

4.3.1 Value proposition ... 23

4.3.2 Customer interface ... 24

4.3.3 Supply chain ... 24

4.3.4 Financial model ... 24

4.3.5 Conclusion ... 25

4.4 Canon – Printing as service ... 25

4.4.1 Value proposition ... 26

4.4.2 Customer interface ... 26

4.4.4 Financial model ... 27

4.4.5 Conclusion ... 27

5. Analysis ... 28

5.1 Results and alternative explanations ... 28

5.2 Limitations of the research ... 29

6. Conclusion ... 31

6.1 Conclusion ... 31

6.2 Recommendations for further research ... 31

7. References ... 32

8. Appendix ... 36

8.1 Interview questions ... 36

8.2 Encoding interview Gerrard Street ... 37

1. Introduction

Linearity is one fundamental characteristic of economy that established due to industrialization and since then a never changed pattern (MacArthur, 2013). The linear ‘production-use-disposal’ product life cycle includes production with resources as input and resource waste as output (Rau & Oberhuber, 2016). This cycle involves one main problem: resources are finite and will run out eventually as Meadows, Meadows, Randers and Behrens convince in 1972 in their book The Limits to Growth. Moreover, the exploitation of natural resources generates growth, which results in enhance exploitation. Eventually, due to the finality of natural resources, this rapid exploitation must decrease, which leads to a decline in input of natural resources and thereby a decline in industrial production (Bardi, 2015). Furthermore, the exponentially growing population compared with the linear resource exploitation will induce a collapse (Meadows et al., 1972). Hence the current and future economy has to deal with one main dilemma in which growth and resource protection are at the opposite of each other. On one hand, the rising global population in combination with the increasing wealth results in a greater demand. On the other hand, the competition on resources such as land, energy, and water is rising due to the negative environmental effect of current production (Godfray, Beddington, Crute et al., 2010). Therefore, the current unsustainable economy has to change to give the world a future (Sachs, as cited in Brand, 2012). In 1987, sustainable development was defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Brundtland, 1987).

In order to build a sustainable world, an insight into the cause is required. The above-described dilemma is caused and maintained by the current economic system (Rau & Oberhuber, 2016). To endure exponential growth, the timescale of consumption has been reduced through decreasing the technical life span of products (Rau & Oberhuber, 2016; Reisch, 2001). Additionally, decreasing the life span through slowing down the technological process contains scheduled aging due to technical, functional or psychological manipulation of products as part of the consumption culture. An example is the ‘1000 Hour Life Committee’ who ensures that all light bulbs glow no longer than 2000 hours to guarantee high consumption and an attractive earning model for the firms (Rau & Oberhuber, 2016). So, a short life span is in advantage of firms because consumption will rise resulting in constant demand and sales. On the other hand, it disadvantages customers because their products are broken quickly resulting in higher costs (ibid). In fact, the customer in the current system has no choice due to the relation between producer and customer that is as followed: the producer is acting at own expense, but the consequence of his acting is being moved through the chain and ends at the customer. So the relatively low quality of products ends at the responsibility of the customer, in spite of his low impact on the production (ibid). However, as long as the producer-customer relation does not change and consumption continues growing, innovations such as more efficient use of resources cannot lead to sustainable development (Cooper, 2005). Consequently, Rau & Oberhuber (2016) argue that shifting the complete responsibility and ownership of the product towards the producer may change the incentives. Additionally, the incentive shifts towards designing products with a long life span in order to generate more revenues per product.

To construct this incentive, a business model based on delivering the service of a product may be a strategy to achieve this (ibid; Tukker, 2004; Sundin, 2009). Moreover, Jonker et al. (2017) presents services as one of the strategies towards circular economy. The concept circular economy (CE) arose as aiming at “decoupling economic growth from resource consumption through new business strategies, innovative product design and extensive recycling processes” (Van Britsom et al., 2016, p. 1). CE makes resources infinite and reduces the waste of natural resources through introducing closed physical loops; Products are not discarded at the end of their life cycle but reused or recycled instead (MacArthur, 2013; Jonker, 2014).

Therefore, the service strategy is intended as sustainable business application and undermining current overconsumption due to short product life span. Product service systems (PSS), service strategies in terms of scientific business literature, provide services of a product instead of selling products, shift the complete ownership of the product to the provider and make customers only users. This will result in customer and business acting as partners because of interdependence (Sundin, 2009). Moreover, the product maintenance is the responsibility of the service provider and the product will return to the service provider after usage. The focus of this study will be on result-oriented services (RS), the most service related perspective of PSS, defined as services that deliver the need of customers and are performance-based. Although result-oriented services (RS) are advocated as building block to CE for decreasing the waste of natural resources and as way to displace the responsibility to producer, limited research focuses on the sustainability aspect of RS according to a literature analysis of Qu et al. (2016). This research project thus aims at investigating the sustainability in terms of ecological and social protection of the business model of RS. This will be accomplished by answering the following research question:

To what extent is the business model of result oriented services sustainable?

To be able to answer this question qualitative research is executed. The qualitative research will emphasize the practical examples of RS by means of desk and field research. The practical examples are represented by four businesses with a RS business model. Mud Jeans (the service of wearing a jeans) and Philips Lighting (the service of light) will be analysed on the basis of desk research. Gerrard Street (the service of listening music) and Canon (the service of printing) will be analysed on the basis of field research. All four analyses will be focussed on sustainability aspects. A merge and comparison of the four analyses will provide a representation of the sustainability of RS.

In order to come to a relevant conclusion, first a literature review will be conducted to congregate the existing literature about the subject of this research. The literature review will result in a conceptual model, which forms the base of the methodology. The methodology will clarify how the research will be conducted and the research question will be answered. The analysis will be done according to the method and will result in results. Thereafter, the results will enable to answer the research question, draw conclusions and discuss them.

2. Literature review

This section has the purpose to analyze and present the existing theories and concepts related to the topic of RS business models and introducing the conceptual model. After defining services and clarifying the concept of PSS and RS, the business model of RS will be explained building on elements of a general business model. Subsequently, in order to research the contribution of RS to sustainability, a sustainable business model framework will be introduced. The literature review of these concepts and variables leads to a conceptual model that visualizes the expected connections between the variables.

2.1 Services and PSS

Services are defined by Kotler and Bloom (as cited in Goedkoop et al., 1999): “a service is any valuable activity a party can provide, that is essentially intangible and that does not result in the ownership of something” (p. 17). This definition is used because of the focus on the element ownership, which will be discussed later. Kastalli, Van Looy & Neely (2013) show how, in the past, research into services was mainly practiced as new way to achieve competitive advantage. Since the 1990s, the rate of product similarity was high and the ability for product differentiation was limited due to high product quality (Tukker, 2015). Therefore, adding services to products as complements by means of PSS became a concept in businesses. A large number of researches used the definition of PSS of Goedkoop et al. (1999): “PSS is a marketable set of products and services capable of jointly fulfilling a user’s need” (p. 18). Inserting PSS was expected to create customer value in a new way. Particularly, benefits were expected for customer loyalty and profitability (Kastalli, Van Looy & Neely, 2013). The increase of customer loyalty has proved over the years by different studies, though the profitability turns out to be less premature (ibid). Moreover, the “service paradox” as defined by Gebaurer, Fleisch & Friedli (2005) states that the increasing service offerings and associated costs for entering the service business do not lead to the expected higher returns. Despite of the “service paradox”, services are still present in businesses but the function is changing. Mont & Plepys (2003) provide PSS as concept that decouples economic and environmental growth by means of reducing the total amount of consumed resources. Furthermore, Nudurupati et al. (2013) recommend organisations to rethink current production and consumption processes and argue that the focus must be on the services delivered by the goods instead of only the goods. The focus on delivering services (PSS) resulting in a reduction in consumed resources proves the possible benefits of PSS for the environment (Goedkoop et al., 1999; Tukker, 2015). Especially in the manufacturing industry it can afford an environmental and economic gain in a large proportion of the cases (Goedkoop et al., 1999). Shortly, the function of services (PSS) in business has changed from only creating economic value towards creating ecological and social value in addition to economic value. Therefore, in this research PSS is redefined as a set of integrated products and services that are designed to decrease environmental damage by means of alternative ways of product use (Mont, 2002).

Tischner as cited in Sundin (2009) presented the different PPS perspectives that have arisen over time (figure 1). First, product-oriented services furnish for sales of product but with some extra service and still the customer owns the product. Second, use-oriented services shift the ownership to the service provider. Furthermore, the traditional product still plays a role only it is about providing the service delivered by the product. Last but not least, result-oriented services (RS) go one step further; the product no longer plays a central role but the result and performance does (Sundin, 2009; Tukker, 2004).

2.2 Result-oriented services

Considering the role of services in this research as a way to achieve CE illustrates the suitability of the most sustainable perspective. Goedkoop et al. (1999) argues that not all PSS perspectives will be ecologically equally attractive. According to Tukker (2006, 2015) and Meijkamp (1998), RS have the highest potential to minimize environmental impact. In fact, RS stimulate sustainable incentives for both service provider and user (ibid). The manufacturer owns the product during the complete lifecycle, which makes the manufacturer responsible for product maintenance and return systems aiming at possible reuse/recycle. This responsibility leads to higher incentives for extending the lifecycle and producing sustainable products (Hu et al, 2012; Tukker, 2006). On the other hand, RS also increase the incentive of the user to consume more efficiently because of modified payment systems (Sundin, 2009). To conclude, RS has the highest sustainable potential and will therefore be used in this research.

Research carried out by Mont (2002), Sundin (2009) and Tukker (2004, 2006) indicated that RS can be defined as: services that deliver the need depending on desirable performance, without focussing on the service-providing product itself. Since the payment of RS is based on use, it is not a matter of product ownership by user but by manufacturer what includes complete responsibility for the firm throughout the life cycle.

2.3 Illustration business model RS

Even though RS deliver the highest sustainable incentive, it also requires the most radical change in business model (Tukker, 2015). RS can only be realised with a careful design but still there is uncertainty about the achievability and the contribution to sustainability (Tukker & Tischner, 2006). Therefore, the following section will describe the business model of RS. In order to do this, it is necessary to define the standard elements (value proposition, customer interface, supply chain and financial model) of business models first.

2.3.1 General business model

According to Lozano & Witjes (2016), a business model is defined as a framework for understanding how firms trade and create value. Nenonen & Storbacka (2010) define a business model as “a framework through which all resources and capabilities of any actor can be presented and understood (p. 9)”. Building on the work of these studies, we define a business model as a framework for creating value by analysing the resources and capabilities of any actor and their interaction. Furthermore, a considerable amount of literature has been published on the elements of business models. Nenonen & Storbacka (2010) provides an overview of these studies and their elements. Consequential, the overview results in four main components of business models as mentioned by Boons & Lüdeke-Freund (2013) and Mentink (2014): value proposition, supply chain, customer interface and financial model. Firstly, value proposition describes delivered value of the product/service offered by the firm (Osterwalder, Pigneur & Tucci, 2005). Secondly, customer interface describes the relation with customers; a description of the target group, the way of getting in touch with customers and the links between the firm and its customers (ibid). Thirdly, supply chain describes the infrastructure within the network of suppliers. Fourthly, financial model describes the costs structure and the revenue streams (ibid). The following sections will describe the business model of RS on the base of these four elements.

2.3.2 Value proposition RS

Several studies (Mentink, 2014; Mont, 2002; Tukker, 2004) suggest that the main emphasis of RS value is performance based: selling a performance and arranging performance indicators. Performance based concepts as RS result in a different value proposition. The value proposition will be described in the following paragraph on the basis of threequestions mentioned by Jonker (2014). The first question is aimed at for whom it creates value; RS can be valuable for business to business (B2B) and business to customer (B2C). B2B can be performed as in the case with Philips lighting as providing the service of light to Schiphol Airport (Duffhues, 2016) or Canon as providing the service of printing to different firms (Canon Business NL, 2017). B2C can be performed as in the case with Mud Jeans as providing the service for customers to lease a jeans (Jonker, 2014).

The second question is about the character of the value creating transaction. RS generate a transaction of money to pay for using the service (Sundin, 2009). However, RS in contrast to product-based systems do not consist of one financial transaction at the moment of sale that determines the whole value (one-dimensional). In addition, RS generate value during the whole product life cycle or even during the life cycle of the resources of the product (three-dimensional) (Jonker, 2016).

The third question is about which stakeholder delivers which value and how. The service generates intangible value that arises from the complete attention to fulfilling client needs (Kowalkowski & Kindström, 2013; Hu et al., 2012). The manufacturer generates value through providing innovate and long-lasting products that deliver the services (Tukker, 2004; Lozano & Witjes, 2016). Moreover, the study of Mentink (2014) presents the changing incentive of service providing firms: make better is sell/gain more instead of make more is selling more. The service provider generates value through improving the life cycle of the product by means of maintenance and responsibility (ibid). The customer generates social value through developing consuming awareness because of pay per use (Mentink, 2014; Tukker, 2004). Additionally, the different stakeholders need to cooperate in the case of RS, which results in a value cycle instead of a value chain (Jonker, 2017).

2.3.3 Customer interface RS

The RS customer interface will be described in the following paragraph on the base of three components: segments, channels and relation.

First, segmentation is an obstacle in RS because it is not a common way of consumption for the customer. Despite RS fulfil needs and demand of customers at a comparable level to more regular models, the shift from consumers to users makes it hard (Kok, Wurpel & Ten Wolde, 2013). The fact that consumers having trouble with change, which is a requirement of RS implementation, results in firms having trouble to commercialize RS (Kowalkowski & Kindström, 2013). Fortunately, the awareness is growing and for this reason the popularity of RS for both business and customer is rising (Kok, Wurpel & Ten Wolde, 2013).

Second, the channel describes the touch points1 _{between business and customer that changes when}

implementing RS. The complete responsibility of the manufacturer of the product implies a direct interface between manufacturer and end-users. Therefore, the service provider can fully concentrate on improving touch points to realize a positive client relation and satisfaction (Goedkoop et al., 1999). Given these points, the touch points will differ in pre purchase phase and will be more intense in the purchase and post purchase phase.

At last, as also shown in the previous text, the relation between provider and customer in the case of RS is stronger than conventionally. Baines et al. (2009) argues that the customer interface of RS is based on a strong and long relationship between customer and business. The customer interface does not end with a single transaction as in case of just selling products. According to Bartolomeo et al. (2003), Martinez et al., (2010) and Mentink (2014) the relationship even extends to a partnership between customer and business that is manifested in a contract. The sales functions will extend their function to managing these customer relationships (Kowalkowski & Kindström, 2013). Even though the language of the relation changes, the way the customer is treated remains the same (Martinez et al., 2010).

2.3.4 Supply chain RS

The following paragraph will discuss the supply chain of RS given the complexity and extension. First, an earlier study (Muall, Smart & Liang, 2014) in which manufacturing supply chains and service supply chains were compared revealed that the complexity of service supply chains is relatively high. In addition, manufacturing supply chains can be seen as a linear model (upper part figure 2), while service supply chains contain bidirectional feedback loops between manufacturer, supplier and customer (lower part figure 2). In addition, the feedback loops require greater cooperation between the service providing firm and its partner network to fulfil a good transferability of capabilities and resources (Martinez et al., 2010; Oliva & Kallenberg, 2003). So, a strong relationship between supplier and manufacturer is required for efficient RS in addition to a strong customer relation. In order to build a framework for successful RS, the partner network is cross-linked caused by strong relationships (Jonker, 2016). Therefore, the contract will contain rules about the division of costs and revenues because of the collaboration between the different actors (Kowalkowski & Kindström, 2013).

1 _{Touch points: “the many critical moments when customers interact with the organization and its offerings on their way to}

purchase and after.” (Rawson, Duncan & Jones, 2013, para. 1)

Besides the presence of a complex supply chain, there is also extension, general and specific, of the supply chain in the case of RS. The general extension is caused by the long-term time horizon because of the responsibility of the actors for the current and future life cycle of the service (Lozano & Witjes, 2016). The long-term responsibility contains the barrier for decision makers to imagine all strategic challenges ahead (Kowalkowski & Kindström, 2013). The responsibility also results in specific extension caused by new parts of the supply chain. The first one is maintenance during the life cycle, which generates a new chain (Martinez et al., 2010). Second, according to Mentink (2014) and Mont, Dalhammar & Jacobsson (2006) RS require a reverse chain to accomplish the distribution of the service providing products and bring the resources back into a new product life cycle.

2.3.5 Financial model RS

Research carried out by Oliva & Kallenberg (2003) indicated that the financial model of RS is complex. Additionally, the profit cannot always be explained in monetary terms (ibid). Though, the following paragraph will discuss the cost structure and the revenue streams of the financial model of RS.

The price that customers pay for the service should include all the costs that are made during the whole product life cycle, mainly costs that were at users expense otherwise (Tukker, 2004). The price includes all the costs, based on opportunity cost of machine failure or traditional maintenance cost (Mentink, 2014; Oliva & Kallenberg, 2003; Tukker, 2015). Furthermore, costs of controlling risks, uncertainties and responsibilities should be predicted what did not have to be considered before (Tukker, 2004). However, the costs of responsibility are also associated with the return of resources resulting in cost reductions. For example, the market value of a half-year-old phone is lower than the raw material value in most cases due to rare materials. So, reuse or recycle can be financial attractive (Jonker, 2016). Considering the high costs relative to the low revenue in the beginning stage (due to pay per use) makes a clear pledge for RS as financing challenging.

The revenue streams of RS are not based on one single moment of payment but of payment during the durability of the service-providing product (Jonker, 2016). The payment can consist of a fixed price based on availability and usage or a dynamic price based on performance and gain sharing. Moreover, the revenue mechanism can motivate the supplier to increase service productivity and the customer to increase efficient usage (Kowalkowshi & Kindström, 2013; Mentink, 2014; Sundin, 2009). In this way the revenue stream of RS is aligned with the value creation process of the customer and supplier resulting in higher value potential and lower total cost of ownership (Kowalkowshi & Kindström, 2013; Lozano & Witjes, 2016).

2.4 Sustainable business model

The following paragraph will build and describe a framework to test the sustainability of the business model of RS as described before. Therefore, the sustainable business model will be discussed with subsequent a visualization of the conceptual model built on the defined theories and concepts. Lovins, Lovins and Hawken (1999) argue that environmental problems can be solved by means of building business models around a more efficient and productive use of natural resources. According to Hart and Milstein (1999), firms that treat sustainable development as an opportunity and change their business model are building a foundation to survive the current century. Boons & Lüdeke-Freund (2013) built on these studies and applied the literature about sustainable innovation to a business model perspective. In this research the framework Boons & Lüdeke-Freund (2013) of sustainable business model will be used because it proposes normative requirements to achieve sustainable innovations. The normative requirements relate to business model implementation.

Futhermore, their sustainable business model is appropriate for not only firms but also for networks of stakeholders, as in the case of RS. The sustainable business model consists of the following four conditions cited from Lüdeke-Freund (2013, p. 13):

1. The value proposition provides measurable ecological and/or social value in concert with economic value (…)

2. The customer interface motivates customers to take responsibility for their consumption as well as for the focal company’s stakeholders (…)

3. The supply chain involves suppliers who take responsibility towards their own as well as the focal company’s stakeholders (…)

4. The financial model reflects an appropriate distribution of economic costs and benefits among actors involved in the business model and accounts for the company’s ecological and social impacts.

2.5 Conceptual model

According to the literature review the business model of RS can be described as follows. First, the value proposition is performance based and value is created during the whole life cycle of the product. This is achieved through responsibility and maintenance executed by the provider, consuming awareness executed by the user and a value cycle executed by the suppliers. The value can be created through B2B or B2C. Second, the customer interface is characterized by customers that have to change to users. This causes a relation between provider and user based on many touch points. Additionally, the relation will extend to the whole product life cycle and therefore business and customer become partners. Third, the supply chain is complex and includes a long-term time horizon. The complexity is caused by different feedback loops between the business, user and suppliers. The long-term time horizon is caused by the addition of maintenance and reverse chains. Fourth, the financial model contains uncertain costs and revenues based on payments during the whole usage phase. The costs that were for the user before have now to be predicted by the business and included in the price. The revenue stream is based on payment per use and therefore fixed or dynamic as in most cases. Furthermore, this payment system can increase efficient usage by the user.

However, the research is focused on analysing the sustainability of the above-described RS business model. In order to research the sustainability, it will be checked if the RS business model meets the requirements of the sustainable business model. The requirements are as follows:

1. The value proposition should include ecological and social value. 2. The customer interface should include customers who use responsible 3. The supply chain should include suppliers who act responsible

4. The financial model should take ecological and social impact into account.

An analysis of practical examples of RS business models will clarify if RS meets the sustainable requirements and to what extent RS contributes to sustainable businesses.

3. Methodology

Based on the methodology of this research described in this section, the understandings from the theoretical framework above will be integrated, processed and critically analysed in order to be able to answer the research question: To what extent is the business model of result oriented services sustainable? A well-defined method for performing this research improves the validity of the paper, the degree to which a test measures what it should measure, and the reliability, the extent to which a test is free of measurement errors (Boeije, 2010 & Walliman, 2011).

3.1 Research strategy

This research has an academic purpose and will be carried out through qualitative research. Qualitative research has been chosen because neither a business model nor sustainability can be fully described by means of numbers. Furthermore, the elements (value proposition, customer interface, supply chain and financial model) are complex concepts which requires a complete and in detailed explanation in order to make it possible to constitute an objective opinion about the sustainability of these elements. The qualitative research is in this case will be based on reasoning in a deductive way: top-down method that starts with a theory and will test this theory during the research. The academic literature and practical examples of RS are part of the observation that will lead to an answer on the research question.

3.2 Research method

The descriptions of the elements of RS- and sustainable business models were based on an analysis of existing academic literature. The description of the business model of RS was in general first and not focussed on sustainability yet in order to achieve an objective and reliable theoretical framework. The literature review provided a fundamental basis for the analysis. However, the academic literature did not include practical examples in spite of the importance of these examples for a complete overview of RS business models. Moreover, academic literature does not describe the RS business model in terms of sustainability. Hence, the analysis of this research is intended to investigate practical examples of RS business models on the basis of the sustainable business model. Considering the limited availability of scientific literature about RS in regard to practice and the sustainability perspective proves the requirement of analysing secondary data of specific cases. Researching practical business examples will be conducted by means of desk research and field research. The businesses (four firms) that will represent the practical examples have a business model that is similar to the business model of RS.

3.2.1 Desk research

Desk research will be applied to the case of Mud Jeans (delivering the service of wearing a jeans to customers) and Philips Circular Lighting (delivering the service of light to Schiphol). Desk research is used for collecting existing facts and research data. To collect the data, websites of and articles about the businesses will be used. In addition to websites and articles, reports about the RS business model and environmental and social circumstances will also be examined. The addition of reports will increase the ecological validity (the extent to which the measurements suit with everyday practice) because reports are more objective and based on calculations and observations in most cases. In contrast to reports, websites and articles are more subjective and based on the opinion of the business itself. Assuming that there is a difference in what companies say and what they actually do, especially when sustainability is considered, indicates the importance of external reports. The collected data will be selected through searching for the availability of the following elements and

the way they are presented: the ecological and social value proposition, customer responsibility, supplier sustainability and cost and benefits including social and ecological impact.

3.2.2 Field research

Field research will be applied to the case of Gerrard Street (delivering the service of listening music to customers through providing headphones) and Canon (delivering the service of printing to businesses). Field research is used for collecting own data. To collect the first data participative observation will be executed. In order to do this, a lecture called ‘Geen lampen, maar licht!’, about the economic model of Thomas Rau and Sabine Oberhuber in which property changes to only use, material rights exist and waste is past will be visited. RS will be discussed with different experts who made the concept concrete. Moreover, the lecture will also discuss the service model applied to Philips Circular Lighting. Beside the lecture, a conference about circular business models organised by Prof. Jan Jonker regarding his research will be visited as well. The conference will be the first opportunity to hear stories about RS in practice and meet businesses with a RS business model. The last part of the field research will consist of two interviews. The two (in-depth) interviews will be semi-structured; the questions (see Annex 8.1) will be predetermined and there will be space to go deeper into interesting subjects submitted by the interviewee. The first interview with Dorus Galama from Gerrard Street will be performed by telephone and the second interview with Judith Voermans form Canon will be performed face-to-face. The interviews are meant to obtain information about the sustainability aspect of the business model of RS. Moreover, the interviews will be built on the literature review and the desk research. To exclude socially desirable answers with regard to sustainability, the interview will start with general questions about the elements of the business model. Additionally, sustainability may be a part of image and marketing, therefore it can be possible that businesses present themselves more sustainable than they are. In case the sustainability aspects will not be mentioned, more specific questions will be asked to ensure enough useful information to answer the research question. The extent to which sustainability comes forward in the interview and the difficulty of procuring the relevant information will determine among other things the degree of importance. After taking the interviews, qualitative analyses are applied to the interviews in order to make them usable for the analysis. The following encoding strategies will be conducted: firstly open encoding by means of segmenting, secondly axial encoding by means of determining core categories and thirdly selective encoding by means of using the core categories to find relations and form connections between the data. Furthermore, the encoding after the interviews (see Annex 8.1; 8.2) is only focussed on sustainability elements of the business model.

4. Results

The sustainability of RS will be discussed on the basis of 4 analyses of practical business examples of RS. Every analysis will be described based on the following four elements. First, the value proposition will discuss the social and ecological value. Second, the customer interface will discuss the relation with the user and the way the business stimulates responsible use. Third, the supply chain will discuss the different actors and the way the business forms responsible suppliers. Fourth, the financial model will discuss the costs and revenues and the influence of social and ecological impact on these. Subsequently, the sustainable RS business model will be presented.

4.1 Mud Jeans – Wearing jeans as service

Mud Jeans allows customers to ‘Lease a Jeans’; wearing a pair of jeans is no longer about consumption but about use (Jonker, 2016; Mud Jeans, n.d.). The addition of owning jeans has low added value, since the purpose is to wear something to protect your body. In 2015, when the business only lasted 3 years, 80% of all sales consisted within the lease a jeans program already (BLUEdot Register, 2015). Therefore, the business model of Mud Jeans can be seen as an example of a RS business model because of the performance focus of just wearing jeans and not owning it as well as the return for reuse/recycle characteristic (Mud Jeans, n.d.). The following paragraphs will describe the business model of Mud Jeans in terms of sustainability. All data in these paragraphs is obtained through desk research.

4.1.1 Value proposition

Bert van Son, the founder and CEO of Mud Jeans, introduced lease a jeans after 30 years of experience in the fashion industry. He believed there had to be an alternative for the fast fashion because the current industry damages environment as well as health and wealth of factory employees (Mud Jeans, n.d.). According to Claudio (2007), the generated potential environmental hazards at every step of the clothing life cycle cause a pollution footprint.

Ecological value proposition

Mud Jeans claims to take the wellbeing of earth’s resources into account and to provide guilt-free fashion through make sustainable jeans in the first place and reuse and recycle the jeans afterwards (Mud Jeans, n.d.). Even though an interview of Lust for Life (2014) with Mud Jeans demonstrates that it is not possible to create 100% new jeans out of 100% old jeans, instead new jeans consists of 40% recycled resources and 60% organic cotton. In 2015 BLUEdot Register, an external firm, conducted an investigation into the savings with regard to CO2 emissions and water use. The investigation

extracts information from international sources in addition to the information provided, which makes the report more reliable and useful to build on the value proposition.

Table 1 presents the results of the research conducted by BLUEdot Register. Furthermore, the statistics show that a significant reduction of water usage and CO2 emissions is achieved. As a matter

of fact, the production of organic cotton is 70 to 80% rain-fed instead of irrigated and the recycling of cotton saves 40% of water (Mud Jeans, n.d.). The CO2 emissions are based on manufacturing,

assembly, finish/laundry, shipping and final delivery (BLUEdot Register, 2015). Social value proposition

Mud Jeans strives to not let factory workers be the victim of profit maximization through realizing lowest possible manufacturing costs. To realize this standard Mud Jeans visits the factory frequently to control the wages and working conditions (Mud Jeans, n.d.). The Young Designer Program of Fair Wear Foundation accompanies Mud Jeans in the process to sustainability by ways of learning and sharing ideas within a group of sustainable fashion brands (ibid; Fair Wear Foundation, n.d.). In 2015 Mud Jeans and Fair Wear Foundation together with Yousstex, one of the fair factories of Mud Jeans, published a report about the working conditions in the factories. The following results are derived from the report and based on document and workplace inspection, consultation of local stakeholders and interviews with managers and workers. First, there is no discrimination based on sex, religion, race or possibility of pregnancy. Second, there is no child labour (kids working under the age of 16) and this is guaranteed by means of ID card control. Third, the factory workers wage is above minimum however workers claim that the wages are not enough to meet living costs. Besides Mud Jeans wants to achieve a wage above average living, figures found in Yousstex, Mud Jeans and Fair Wear Foundation (2015) show that the real wage of factory workers is below living wage. Fourth, the safe and healthy conditions are well known by the managers. Nonetheless, the factory workers are only aware of the weekly doctor visits and the availability of medicines.

4.1.2 Customer interface

30% of the clothes in a customer’s closet have not been worn for approximately one year (Mud Jeans, n.d.). The concept lease a jeans makes it easier for customers to give their product a ‘second life’ and to avoid unnecessary clothing stock. Although, Mud Jeans still gives customers a choice of buying or leasing, which makes motivating customer responsibility doubtful. In case of buying jeans, the responsibility of the customer is only stimulated by the ten euros discount the user get when returning the jeans after usage (ibid). Customized vintage jeans cannot be returned what motivates the customer to not edit their product, a source of little increase of customer responsibility. In case of leasing a jeans which is chosen by 40% of the customers of Mud Jeans (CNBC, 2016), the customer has a relationship with Mud Jeans based on a contract which includes payment- and returning rules. The payment is monthly based instead of based on number of times used, so no incentive for higher customer responsibility. The options for returning after usage are almost the same as in the case of buying jeans: keeping, switching or returning.

4.1.3 Supply chain

The supply chain of lease a jeans consists of a large network of nine worldwide factories located around the Mediterranean, repair services, packaging- and distribution firms (Mud Jeans, n.d.). According to Mud Jeans, the product produced and shipped by the suppliers are highly efficient and durable due to the incentive of providing a product that lasts. The responsibility of suppliers to produce a product that lasts is stimulated by less repair costs, which is free for the customer, and more revenue per unit (Jonker, 2016). The responsibility of all suppliers of Mud Jeans to work with respect for nature and social environment (human rights, workers’ rights, corruption) are guaranteed by means of the Code of Ethics & Code of Conduct For Supplier. The code is built on ethical trade principles founded on agreements and documents of UN and International Labour Organization (Mud Jeans, 2017). In case of violation, the supplier has to insert rules to prevent further violation otherwise the contract between supplier and Mud Jeans will be ended (ibid).

4.1.4 Financial model

The costs of lease a jeans mainly consist of financing fair producing processes socially and ecologically. Besides, in the beginning Mud Jeans had trouble with monthly pre-finance for the costs of producing because the revenue stream is slowly getting started due to monthly pay. Therefore, now Mud Jeans also provides the option to buy jeans (Esser, 2015). No information is provided about inclusion of extern costs of ecological and/or social impact. The revenue stream contains the monthly payments of lease a jeans and one moment in time payments of buying jeans. Figure 3 illustrates the revenue model of Mud Jeans. The payment includes all the costs during the lifecycle of the product (7,50 euro per month) and provides a discount when returning the jeans. According to the video of Lust for Life (2014) one-year contract is the minimum duration; otherwise it is not financially feasible.

4.1.5 Conclusion

The business model contains a clear ecological value proposition. However, the social proposition is presented in the business plan but not in practice. Also the customer interface is unsustainable; customers are not stimulated to use their service consciously. By way of contrast, the business model contains responsible suppliers who act accordingly environmental and social protection. Conversely, it is unclear of the business model of RS includes costs and benefits adjusted to ecological and social impact.

4.2 Philips Lighting – Light as service

Philips introduces ‘Circular Lighting’ in which property is replaced by use and the subject changes from light bulb to light. In 2015, collaboration between Royal Philips (Circular Lighting), Cofely and Schiphol Group induced the pilot case Light-as-a-service (Duffhues, 2016; The Financial, 2015). Schiphol Group pays for the light it uses and Cofely and Royal Philips are responsible for the performance during the whole product lifetime including reuse and recycling of the light bulb (The Financial, 2015). According to Duffhues (2016), the project could support the sustainability ambition and quality and cost efficiency of Schiphol. On the other hand, the project creates a financial incentive for Philips to produce energy efficient and long lasting light bulbs in exchange for fixed revenue over fifteen years (Laubscher & Marinelli, 2014). The following paragraphs will describe the business model of Philips circular lighting in terms of sustainability. All data in these paragraphs is obtained through desk research.

4.2.1 Value proposition

Circular Lighting provides the service of light not through the luminaire the user wants, but Philips chooses the luminaire that best fit the users wishes (Philips, 2017b). In brief, circular lighting is performance based and creates value by means of delivering the need. According to Philips Lighting (n.d.), circular economy is essential to achieve sustainability. Therefore, circular lighting emphasizes energy efficiency (ecological value) and Dutch Working Conditions Legislation (social value) as well. Ecological value proposition

Philips Lighting (n.d.) claims to: “create an ecosystem that extends the life of our lighting products and provides a better future for the next generation” (para. 3). In fact, the luminaires at Schiphol are 50% more energy efficient and have a 75% longer lifetime than the precursor (Philips Lighting B.V., 2017d). Further, ecological value creation through energy efficiency and longer life span is maintained by the conditions of circular design. Furthermore, the product is modular, contains possibilities for upgrade, maintenance, detach and recycling. Additionally, the product must pass the test of circularity estimation on the basis of a scorecard (Philips Lighting B.V. 2017a). All these conditions ensure product, component and material reuse of high quality (Laubscher & Marinelli, 2014). In the end, materials do not lose their value during their lifecycle; there is no difference between ‘new’ and ‘old’ materials (Philips Lighting B.V., 2017b). Nevertheless, research of Duffhues (2016), concerning the pilot case of Schiphol, approves that the sustainability goals are not clearly represented in the contract. Duffhues argues that KPIs are required to ensure insights in ecological value in terms of energy efficiency, end-of-life disposal and CO2 emissions. So, Philips introduced

many conditions to make sure that ecological impact remains minimal, however in practice indicators for measuring the impact are present to a limited extent.

Social value proposition

Neither Philips Lighting nor circular lighting has a own social value proposition, as far as desk research proves. Nonetheless, the product that delivers the service only differs in design from the normal light bulb. So, the general light bulb and the RS light bulb can be produced in the same factory and will influence the same people and thus contain the same social conditions. Therefore, Philips annual report 2016 (Koninklijke Philips N.V., 2017) will be used to obtain information about the social value creation. First, the report describes that Philips strives to create a healthier and more sustainable world. Philips improved the lives of 2.1 billion people in 2016 of which 1.3 billion lives are improved through innovations of Philips Lighting, all green products among which light as a service (ibid). Additionally, health and safety performance of the employees is measured using Lost Workday Injury Case (LWIC). LWIC rate of Lighting improved from 0.34 in 2015 to 0.22 in 2016 (ibid). It is doubtful to what extent the improvements of social value are due to circular lighting.

Considering more than half of improved lives is due to green lighting products illustrates that the influence of circular lightning on social value is expected to be large.

4.2.2 Customer interface

According to Koninklijke Philips N.V. (2014), the customer interface changes affectedly, Philips and their customers become partners in creating the most suitable result. The process starts with determining the requested result, in which user and Philips cooperate. During usage, the user can contact Philips Lighting in case something is defect or wrong and will take care of the problem from this moment. Depending on the need and agreements, Philips will come by for repair. Additionally, the user can contact Philips in the duration of the contract for problems, for example problems concerning energy use or pre-calculated usage costs (Philips Lighting B.V., 2017b). Furthermore, costs adapted to expected use and possibly further adaption during use stimulates the customer to the responsible use of the service (ibid). Considering the case of Schiphol as example of B2B illustrates the stimulation of responsible use by means of creating a sustainable image for the firm (ibid). So responsible use by the customer is stimulated through payment systems on one side and branding on the other side.

4.2.3 Supply chain

According to Philips Lighting B.V. (2017b), all responsibilities from design to maintenance are with Philips. Even though, Philips Lighting does not deliver all services themselves. Alternatively, Philips operates as organizer of the supply chain and collaborates with external technical partners, designers and suppliers and manufacturers (Koninklijke Philips N.V., 2014). The main suppliers are Royal Haskoning, technical consultancy, and ENGIE, offers technical service for installations and energy generators (Philips Lighting B.V., 2017b; 2017d). If technical service is not enough and replacement is required, the defective product or component is taken back by Philips and returned to the relevant manufacturer for reuse or recycling (ibid). All useful components are recovered and used for repair of other luminaires, which results in savings. If reuse is not possible, components are transported to recycle partners of Philips (Philips Lighting B.V., 2017c). Disposal only occurs in occasional cases. Therefore, return and reuse encourages Philips and their suppliers to design and produce a luminaire in a more sustainable way. Transport is carried out by logistics service DHL who attempt to and be asked to deliver efficient and environmentally friendly (ibid). According to Laubscher & Marinelli (2014), more information regarding material composition and wear and tear can determine reusability and value of the product.

Philips also has two core policy documents to ensure supplier sustainability compliance. The first policy is the Supplier Sustainability Declaration, mainly based on the code of the Electronic Industry Citizenship Coalition, a group of companies in the electronics industry that create sustainable value for environment, workers and business (EICC, n.d). Therefore, this policy covers health & safety, labour, environment, ethics and management systems Koninklijke Philips N.V., 2017). The second policy is the Regulated Substances List, suppliers are required to follow all guidelines regarding chemical substances (ibid). In brief, Philips and thus circular lighting stimulates suppliers to act responsible, with taking environmental and social aspects in account. Even though the stimulations for responsible acting, the case of Schiphol does not include necessary incentives for investment in sustainability for the supplier according to Duffhues (2016).

4.2.4 Financial model

The costs of Philips circular lighting decrease if the efficiency and life span of the product as well as the component rises because of reducing transport and repairing costs. For example, Philips provides NUS with the service of light, in exchange NUS pays Philips a fixed amount based on energy usage. In case the energy use is higher than expected, Philips has to pay NUS back and so

Marinelli, 2014). Additionally, the return value of the products is deducted of the costs and included in the business model (Philips Lighting B.V., 2017d). In consequence, Philips can offer a respectable price to customers. As a matter of fact, the savings on the energy invoice of the user is almost as high as the costs of the circular light (Philips Lighting B.V., 2017b). Philips shows no evidence of including ecological and social impact of the product in the costs and revenues.

4.2.5 Conclusion

The business model of circular lighting contains a clear ecological value. The social value is not represented through circular lighting particular, but rather by Philips in general. However, the green products (including circular lighting) improved many lives. Although, the given information about improved lives cannot be seen as the most reliable and valid measurement for social value. The customer interface creates responsible users by means of pay per use. Concerning the supply chain, this is the same as for social value; Philips has general supplier policy codes for sustainability. Moreover, the large scale of returns creates an incentive for responsible acting. The financial model is the only element that does not provide any proof for a sustainable business model; costs and revenues does not include ecological and social impact.

4.3 Gerrard Street - Listening music as service

Gerrard Street provides headphones, a product that normally is thrown away when one part is broken. To end this linear economy, Gerrard Street has chosen to be one of the first firms in the electronics industry with a scalable circular business model. In this way saving waste is combined with a business model, loose components can be replaced and broken components can be recycled. The payment system involves users who pay a monthly fee of 7,50 euros instead of 250 euros once, in exchange for using the headphone. According to interviewee Dorus Galama (see Annex 8.2), the mission of Gerrard Street is to provide an indestructible quality product as service according to the rules of circular economy. Their vision is to prove the market that circular economy, in the way of paying per month and creating circular waste streams, is possible for both producer and user. Furthermore, Galama compares their firm with a demonstration project in which scale expansion is more important than generating profit. The following paragraphs will describe the business model of Gerrard Street in terms of sustainability. All data in this paragraphs is obtained through an interview with Dorus Galama, co-founder Gerrard Street (see Annex 8.2).

4.3.1 Value proposition

Gerrard Street offers carelessness when listening high audio for a low amount per month. Moreover, carelessness is achieved through releasing the user from product responsibility. The service is provided to 3 types of users with different ways of value creation.

1. The happy user who wears a lot of headphones in his life and is better off with a subscription (value of carelessness).

2. Second, the practical user who cannot pay 250 euros once but still want to have high audio (value of affordability).

3. Third, the conscious user, a small but significant segment, who support the vision of Gerrard Street (value of environmental awareness).

The fundamental of Gerrard Street is circular economy, which results in a vision mainly covering the ecological value proposition. However, Galama admits that also the ecological value proposition is represented on small scale. In fact, 350 headphones are repaired and defect components are reused or recycled, both resulting in waste saving. Despite the waste saving, repairing requires more transport resulting in higher CO2 emissions. Additionally, there is no mention of ecological value at

Additionally, Galama states that producing in a sustainable way including recycling only can be fully implemented if the scale is increased. Therefore, currently the focus is to a low degree on ecological and social value and to a high degree on scale expansion.

4.3.2 Customer interface

Gerrard Streets needs a high level of persuasiveness to convince consumers of their service. Furthermore, the consumer is open to it but does not immediately understand the purpose and see why they should choose to pay per month and not owning the product. However, when a consumer became a customer/user the relation is rapidly strengthened because of many contact moments. The strong relation due to much interaction provides two advantages for Gerard Street. First, there are many possibilities for receiving feedback that can improve the concept directly and customer relationship indirectly. Second, there is less asymmetric information between firm and user. Even though the strong relation, Gerrard Street does not use this opportunity to form responsible users. Galama explains the lack of stimulating responsible use as digging your own pitfall; responsible use results in less use with less revenue for the business as consequence. For example, if washing machines are used more responsibly the user only washes when the machine is completely filled and therefore uses the machine less. In the case of Gerrard Street, they provide an expensive headphone that cannot be profitable if the payment is per use as the case may be with responsible use. Besides payment per use, Gerrard Street has considered to exclude repairing costs of the subscription. Excluding repairing costs creates the incentive of responsible use for the user, while the incentive of producing qualitative long lasting products of the producer declines. Therefore, Gerrard Street has chosen to let users pay a monthly fee although it does not encourage responsible user behavior. Nevertheless, according to Galama, the user behavior is not characterized by recklessness, probably because of the attraction of already conscious users.

4.3.3 Supply chain

The supply chain of Gerrard Street contains many movements of materials, especially due to replacing defective components. First, a new version of the defective component has to be arranged after which it is sent to the user. Subsequently, the defective component must be returned to the office of Gerrard Street for storage. In fact, 99% of returned items consisted of cables and further some sound boxes were returned. The items are stored until those numbers are high enough that recycling makes sense. Considering recycling is not yet a fixed part of the supply chain explains the relatively normal producer-supplier relation in case of Gerrard Street. According to Galama, being circular mainly changes the product design but in this phase suppliers are not highly involved. In contrast to reusing/recycling, which is not yet practiced. Therefore, Gerrard Street does not encourage the suppliers to produce in a responsible way because components are not returning to the suppliers. However, suppliers see potential growth in the concept and consequently want to cooperate with Gerrard Street and their vision.

4.3.4 Financial model

The most important part of the costs consists of refurbishment- and transport costs. The refurbishment costs arise when components are defect or when the subscription ends and the headphone is suitable for reuse. In case of defective components, new components should be send and old ones returned. These refurbishment costs are included in the price the user pays monthly. Considering refurbishment reduces the ecological and social impact of the headphone proves that these impacts are partly represented in the price. However, the impact of transport on the environment is not included in the price. Moreover, recycling increases the transport costs of Gerrard Street, especially because most transport contains individual shipments instead of batches. The costs are covered through providing the service of listening music for 7,50 euro per month (figure 4). The price is aimed at achieving a break-even point but is mostly a guess because many variables are not

yet rated. Furthermore, the customer lifetime is the hardest to predict variable because after one year the subscription is monthly terminable. Although, the customer lifetime is the most important driver of the financial model because the revenue only consists of the payment per month of use. If the costs are set against income, there is no direct economic return; the transport costs concerning refurbishment are higher than purchasing and delivering new components. However, refurbishment belongs to the branding of Gerrard Street and is therefore part of indirect economic return through scale expansion. Due to the lack of direct economic return the investors should have the same point of view as Gerrard Street: putting circular economy in a positive daylight on the market in which for example not profit nor plastic savings is the most important. Therefore, calculating social and ecological impact in financial terms is not yet discussed and the financial model is nothing more than purely financial. Nonetheless, Galama expects that social and ecological savings will be discussed if Gerrard Street has succeeded in designing a circular good working example.

4.3.5 Conclusion

In general, the business model is dependent on the scale of the sales. Because of the small scale of Gerrard Street, sustainable development is not in the first place, putting circular economy on the market and proving its success is. Therefore, all the elements of the business model include the elements of RS but do not achieve the conditions of a sustainable business model. When the scale is increased, responsibilities will increase due to more refurbishment and a sustainable will most likely follow.

4.4 Canon – Printing as service

Leasing is a well-known phenomenon in the printing industry. Moreover, one of the statements is that purchasing a printer is expensive for individuals as well as businesses. In fact, only 5 to 10% of the customers buys a printer. In the nineties, Canon realised that the printer has a longer life span than the life span spent at one customer. Since in most cases the contract is leasing based, the possibility existed to return the product and do something useful with it. In order to use this possibility and increase the life span, nowadays printers are recycled, reused or even remanufactured. Canon is responsible for the printer during its whole lifetime. Especially, the introduction of printer EQ80, which is specially designed for remanufacturing, increased the life span and decreased the environmental impact of the printer. According to interviewee Judith Voermans, the development of and the demand for sustainable printers or alternatives will rise even more (see Annex 8.3). The following paragraph will describe the business model of Canon in terms of sustainability. All data in this paragraph is obtained through an interview with Judith Voermans, sustainability expert Canon Nederland (see Annex 8.3).