Towards sustainable business models : investigating the barriers to sustainable business model innovation and the role of opportunism : an agency theory perspective

(1)

Towards Sustainable Business Models

Investigating the Barriers to Sustainable Business Model innovation and

the Role of Opportunism - an Agency Theory Perspective

Tim Tielemans - 10528741

30-08-2015 - v1.0 FINAL

Executive Programme in Management Studies – Strategy Track

UvA

(2)

Preface

What an amazing journey this has been. In the process of writing this thesis I have experienced emotions ranging from happiness to extreme frustration when things were not moving forward as intended. The same was true for the rest of the course at the UvA. Fortunately everything fell into place at some point and the result is that I am now writing the last words that will end this 2.5 year adventure. Thank you Wendy for your endless support and patience in the times I needed it. Sometimes you were probably wondering who this guy behind the desk was but I will make sure to introduce myself again. I would also like to thank my parents since without them this whole deviation from the original walk of life would not have been possible. Many thanks to my supervisor Lars who has helped me to keep the focus in my thesis and his reassurance that everything would fall into place in the end. Last but not least I would like to thank my classmates who have been an inspiration over the last 2.5 years. I sincerely hope that I have returned the favor!

(5)

Abstract

Companies preparing to transform their business model to a sustainable business model face several barriers. How can these barriers be overcome to build a sustainable future? A case study on Circular Economy in Royal Philips N.V. was done to identify the barriers to sustainable business model innovation and the influence of opportunism from an agency theory perspective. The focus of this dissertation lies on internal barriers which were divided into cognitive and political barriers. More specifically barriers based on asset specificity, lack of complementarities, lack of efficiency, dominant logic and diverging interests were identified.

Opportunism was categorized into individual behavior based on self-interest, risk aversion, or bounded rationality. This study found a significant influence on the barriers to sustainable business model innovation based on opportunism and highlights the existence of information asymmetries which can open the door to individual opportunism. Strong evidence was found that supports the importance of extrinsic motivation schemes and top management to reduce individual opportunism and enable sustainable business model innovation. Effectuation was also investigated and its importance for successful sustainable business model innovation was clear, however no relation to opportunism was found.

The contribution to the literature is twofold. Firstly this study shows which barriers can be expected in the process of sustainable business model innovation. Secondly it offers a deeper insight in how these barriers can be reduced by focusing on individual opportunism. Ultimately the goal of this thesis is to accelerate the design, implementation and performance of sustainable business models in theory and practice.

(6)

1. Introduction

Corporate social responsibility (CSR) is a concept that has grown in presence ever since its conception in the seventies. CSR has been defined by a multitude of authors so to maintain clarity we adopt the definition offered by Aguinis (2011) “context-specific organizational actions and policies that take into

account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance” (p. 855). Whether you read about it in the newspaper, turn on the television or go to the

supermarket; sustainability is hot and trending and cannot be ignored anymore. Consumers become more aware and more critical about the impact of products and services on the environment and society, as do companies and governmental institutions. Gone are the days where companies are not being held accountable for their actions (WWF International, 2012). Companies take CSR into account when selecting suppliers and impact on the environment is often used as a performance measurement metric in annual reports (Philips, 2014). Adding to this development, governmental institutions are imposing ever stricter rules and regulations when it comes to societal and environmental impact of companies. Regardless of this development, the bottom line why most companies exist is to create economic returns, so this makes the economic component extremely important when considering CSR. However, more and more companies are trying to develop and implement new business models to create the before-mentioned economic returns, with minimum detrimental impact on, or even contribution to the environment and society.

Traditionally firms tend to focus on product and/or process innovation for economic, environmental or societal benefits. Recently a third concept has been added to this list; business model innovation. This concept has received increasing academic attention over the past decade. The right business model can help companies to enhance value creation potential of product and process innovations (Amit & Zott, 2010). Especially in high-tech markets increasing amounts of firms tend to prefer changing their business

(7)

(Chesbrough & Rosenbloom, 2002). The business model can be defined as “the bundle of specific

activities that are conducted to satisfy the perceived needs of the market, including the specification of the parties that conduct these activities, and how these activities are linked to each other” (Amit & Zott,

2010, p. 2). It encourages a “holistic view and systemic thinking on how business is conducted, with an

emphasis on value creation” (Amit & Zott, 2010, p. 9). Sustainable business models are new business

models that try to create economic, societal and or environmental value (Jonker, Tap, & Straaten, 2012).

Circular Economy (CE) is an example of a holistic conceptual concept that can be embedded in new sustainable business models. It describes a new way of systemic thinking where the goal is to “decouple

economic growth and development from the consumption of finite resources” (Ellen MacArthur

Foundation, 2013). In essence it is a new economic model that differs greatly from the ‘regular’ way of doing business. Most industries rely on a linear ‘take, make, dispose’ business model where easy access to large quantities of resources and energy is critical for success (Ellen MacArthur Foundation, 2013). These resources are often finite and therefore incremental efficiency increases reducing resource usage and energy consumed per unit will not change the inevitable depletion of said resources (Ellen MacArthur Foundation, 2013). CE can provide a framework to design out waste and build resilience through diversity, to use renewable energy sources and to think in systems and of ways to extract additional value from existing products and materials by cascading them through other applications (Ellen MacArthur Foundation, 2013).

The goal of this thesis is to investigate the barriers that companies encounter during sustainable business model innovation and how these differ for business model innovation without an environmental or societal component. How can firms make steps towards a CE, or in other words, how firms can transform their existing business models to successful sustainable business models (SBMs)?

(8)

Even though the picture painted by Ellen MacArthur is quite compelling and deceivingly simple, there are several big challenges that have already been tackled, or still lie ahead for pioneer firms that want to move towards SBMs. “At the macro level, a successful CE would foster growth and reduce vulnerability

to resource-price shocks. But in the short term, there will inevitably be significant up-front investment costs and risks for businesses – e.g. retooling machines, relocating whole factories, building new distribution and logistics arrangements, and retraining staff” (Preston, 2012). Considering this, it should

come as no surprise to the reader that the past decade has seen an increase in research on the design (Stubbs & Cocklin, 2008) and implementation of sustainable business models (Boons & Lüdeke-Freund, 2013) (OECD, 2012) (Boons, Montalvo, Quist, & Wagner, 2013) (Matos & Silvestre, 2013). In contrast, very little research has been performed towards visualizing the barriers that block sustainable business model innovation. This work is important so companies can more readily overcome these barriers so that economic, ecological and social goals can be realized and competitive advantage can be achieved. To gain more insight into this research gap and to get the required focus for this dissertation two research questions have been formulated:

1) What are the barriers to sustainable business model innovation in high-tech firms?

2) Does opportunism have a moderating role on the barriers to sustainable business model innovation?

By answering these two research questions, insight can be gained in the blocking factors of sustainable business model innovation. This empirical research is therefore highly relevant for practice and can be used by managers to learn from others’ success stories. Theoretically it contributes to the literature on sustainable business model innovation and explores the link between opportunism and sustainable business model innovation. Teece (2010) argues that “increased understanding of the essence of

(9)

needed. To gain these insights, a literature study was conducted, followed by a qualitative exploratory case study in a leading global Healthcare and Electronics company. Key persons in the organization were interviewed and the collected data was triangulated with secondary data (brochures, slide decks, company research, websites, internal communications etc.) to ensure internal validity.

(10)

2. Literature Review:

2.1 Sustainability in Business

Access to information is becoming a commodity. These decreasing information asymmetries between public and business have led to increased societal stakeholder pressure on firms. The purely economic view (Friedman, 1970) or ‘linear’ way of doing business is believed not to be sustainable in the long-term anymore, and businesses are being held accountable for the environmental and societal problems they cause. Elkington (1994) first captured the need for a broader view in his triple bottom line perspective. He explained the impact businesses have on ‘people’, ‘planet’ and ‘profit’ and how firms should adapt their business models & strategies to all three of these dimensions to be able to gain and sustain a competitive advantage in the future. Since the nineties, a multitude of authors have argued why more attention to the triple bottom line can add value (Porter & Kramer, 2006), but so far have only been able to define generic strategies (Salzmann, Ionescu-Somers, & Steger, 2005) on how to implement the needed changes that lead to successful businesses and eventually competitive advantage (Stubbs & Cocklin, 2008) (Lovins, Lovins, & Hawken, 1999) (Haanaes, Michael, Jurgens, & Rangan, 2013). One can question the practical relevance of these generic concepts which is an often mentioned criticism of scientific publications in general (Bennis & O'Toole, 2005). The article of Porter & Kramer (2011) is a fine example in which they argue that businesses should adopt a new approach to value creation where instead of optimizing short-term financial performance, firms should try to create shared value for society and business by adressing societies’ “…needs and challenges” (p. 64). Why should the former exclude the latter? It is not hard to imagine a situation where short-term financial performance accomodates for long-term value creation. In another part of the article the authors state that: “The

more business had begun to embrace corporate social responsibility, the more it has been blamed for society’s failures” (p.64) implying that firms are facing an increasing legitimacy problem. Most likely the

(11)

cause of the legitimacy problem is not the fact that businesses are increasingly embracing corporate social responsibility, but the fact that consumers are becoming more aware of the actual impact business has on society and the environment. This is a clear indication that more research is needed on the translation of generic strategies related to sustainability into specific new sustainable business models, and more specifically the barriers that prevent firms from successfully embedding corporate sustainability in their business models to create value. A belief and empirical evidence seems to be lacking on societal, individual and organizational level with regards to the benefits that sustainable business model innovation can bring in the long-term.

2.2 The Business Model

One way to gain insight in an organizations’ decision making rationale, possibly creating a stronger link between literature and practice, is through the concept of business models (Margretta, 2002). The business model resembles a blueprint of the processes required for a firm to create value for their target consumers. Chesbrough & Rosenbloom (2002) call this the value proposition and state that a business model should identify a market segment, define how a company should create revenue and how it should organize the distribution of its product offerings.

The concept of business models as a unit of analysis is relatively new and increasing interest has only emerged recently (Zott, Amit, & Massa, 2011). One of the main findings of Zott, Amit & Massa (2011) is that there seems to be a shift in attention from value appropriation towards value creation. Chesbrough (2010) reinforces this finding by arguing that “the economic value of a technology remains latent until it

is commercialized in some way via a business model and that the same technology commercialized in two different ways will yield two different returns” (p. 354). These two studies indicate that business

models are very relevant in the value creation process which validates the focus of this research on a specific sustainable business model.

(12)

2.2.1 The Sustainable Business Model

What defines a sustainable business model? Stubbs & Cocklin (2008) conceptualize an ideal type sustainable business model based on ecological modernization worldview; a business model features prevention, innovation, and structural change towards ecologically sound industrial development. Albeit being a rather broad definition, it fits quite well with the CE concept. By decoupling growth from resource usage, CE seeks to transform modern business thinking towards less impact on the environment and society. Stubbs & Cocklin (2008) find that both structural (processes, organizational forms and structures, business practices) and cultural characteristics (norms, values, behaviors and attitudes) of sustainable business models are of importance when firms try to achieve their sustainability objectives. They argue that the ‘reason of being’ for an organization should be drawn from a triple bottom line perspective, and should be used in measuring the actual performance of the firm. Sustainability concepts should shape the driving force of the firm and its decision making. Again, this fits very well with the concept of CE because it can have an impact on the entire value chain and leads to end2end thinking. Even though quite some firms have started measuring their sustainability performance and the Dow Jones Sustainability Index is just one example of how this performance can be measured between companies, it is still far away from sustainability being a driving force of the firm.

Jonker, Tap, & Straaten, (2012) explored multiple sustainable business models and tried to identify the main characteristics of these sustainable business models. Arguably incomplete, they still offer an extensive list of characteristics that were mentioned by respondents. They found that an important aspect of sustainable business models is to enable new connections, facilitate and maintain them (p. 20). Sustainable business models seek to change behavior on a systemic level and are therefore unsuccessful without long-term commitment and cooperation between partners. Secondly sustainable business models are created from a triple bottom line perspective where value should be created on an economic level, but also on a societal and environmental level. Thirdly money is not the only medium of

(13)

exchange anymore where time or access to capabilities can be exchanged to enable profitability. Fourthly they notice a tendency to change from owning resources to having access to them (Pay per use instead of pay to own). Finally they found that financial sustainability is a vital prerequisite for a new sustainable business model. At the end of the line a new business model should lead to economic profit. They should enable partnerships and cooperation’s and they should be embedded in society where the value created for society should also lead to value created for the individual entrepreneur.

Some companies are experimenting with sustainable business models. Clinton & Whisnant (2014) describe twenty examples of sustainable business models in their paper. These business models are based on environmental impact (rematerialization), social impact (buy one, give one), financial innovation (crowdfunding), base of the pyramid (microfinance) and diverse impact (behavior change). Each of these sustainable business models have great potential to have a positive impact on the triple bottom line but they also realize that many times the most impactful firms actually like the status quo, and do not feel a need to transform their business model into a more sustainable business model. These firms subsequently do not get past the experimental phase of business model innovation. The fact that the subject firm of this case study is a global industry leading company that is trying to be a forerunner in the implementation of circular thinking in its businesses, adds significantly to the relevance and added value of this study.

Ludeke-Freund (2009) studied the conceptual integration of business models into contexts of corporate sustainability. He developed a framework for sustainable business models based on the four pillar business model framework (product, customer interface, infrastructure management, financial aspects) created by Osterwalder & Pigneur (2004) by adding a fifth non-market pillar. The traditional four pillar model only focuses on the economic function of the firm and leaves no room for environmental and social aspects. The fifth pillar extends the original framework based on the premise that environmental

(14)

and social aspects do not originate from economic perspectives. The purpose of the non-market pillar is “to figure out the value that is created with and for society and the environment when a business model

is applied to create customer equity and customer value” (Ludeke-Freund, 2009, p. 43). In addition to the

fifth pillar a process of accentuation within the first four market pillars should take place to establish and highlight the already existing aspects of corporate sustainability (Ludeke-Freund, 2009). These accentuated areas and the non-market pillar will then show the value created for the customer, the company, society and the environment. There is one limitation to the model; only those resources and activities are considered that link to a business model’s value proposition, meaning that philanthropic CSR activities are not taken into account (Ludeke-Freund, 2009). The CE business model is not concerned about philanthropic activities, there has to be an economic incentive to the changes, so again it fits well with the model proposed by Ludeke-Freund (2009).

Bocken, Short, Rana, & Evans (2014) propose several sustainable business model archetypes to provide a starting point to broaden and unify the research agenda for sustainable business models. These archetypes are; maximise material and energy efficiency, create value from ‘waste’, substitute with renewables and natural processes, deliver functionality, rather than ownership, adopt a stewardship role, encourage sufficiency, re-purpose the business for society/environment, develop scale-up solutions. CE can be categorized as a sustainable business model according to the ‘maximise material and energy efficiency’ archetype. It also has a clear triple bottom line focus and seeks other means of exchange than money (Jonker, Tap, & Straaten, 2012) and is in line with the definition of Stubbs & Cocklin (2008). Therefore the implementation of CE in the focal firm can be used as a relevant case for this study.

(15)

2.3 Sustainable Business Model Innovation

In this thesis the transition from one business model to a sustainable business model will be referred to as sustainable business model innovation. There is no doubt that business model innovation can play an important part in firm performance. One of the most well-known examples is IBM changing its business model, transforming the company from a product to a service company, which proved to be highly successful (Chesbrough, 2007). Clinton & Whisnant (2014) argue that business model innovation “ultimately involves a novel form of exchange at some point along a company’s value chain. When that

exchange, sometimes completely new, other times just different, creates new social or environmental value, and/or distributes economic value more equitably for more stakeholders, then it may be considered business model innovation for sustainability” (p. 17). This definition is in line with the five

market pillar model of Ludeke-Freund (2009) and reinforces the choice of CE as a case for this study.

2.4 Drivers to sustainable business model innovation:

Amit & Zott (2001) identify novelty, lock-in, complementarities and efficiency as key drivers of business model innovation. In a later study they focus on activities as the main unit of analysis for business model innovation. “A novelty-centered activity system adopts new activities (content), and/or new ways of

linking the activities (structure), and or new ways of governing the activities (governance). Activity systems can also be designed for lock-in, their power to keep third parties attracted as business model participants. Lock-in can be manifested as switching costs, or as network externalities that derive from the structure, content and/or governance of the activity system. Complementarities are present whenever bundling activities within a system provides more value than running activities separately. Efficiency-centered design refers to how firms use their activity system design to aim at achieving greater efficiency through reducing transaction costs. For example, a focal firm may decide to integrate vertically to avoid being ‘taken hostage’ by its trading partners.” (Zott & Amit, 2009, p. 6)

(16)

When the new business model allows improvement on any of these factors, it should eventually allow an improvement in performance of the new business model over the existing business model. The question is whether in the case of sustainable business model innovation these are also the key drivers, or whether there are additional drivers related to sustainability.

Other drivers for corporate ecological responsiveness have been identified in previous research (Bansal & Roth, 2000). These are changes in legislation (Lampe , Ellis, & Drummond, 1991), stakeholder pressure (Buchholz, 1991), economic opportunities (i.e. reducing waste) (Lampe , Ellis, & Drummond, 1991) and ethical motives (Wood, 1991).

Combining the drivers for ecological responsiveness with the drivers for new business models as identified by Amit & Zott (2001) we get a clear picture of what drives companies to experiment with new sustainable business models. At one end of the spectrum a business model innovation could be driven by purely economic incentives. At the other end of the spectrum the driving force can be based on ethical motives. However, it is naïve to think that successful business models can be created purely for the sake of philanthropy; somehow there needs to be an economic incentive to warrant a business case for sustainability. Visser (2010) argues that part of the solution lies in changing our mindset. Instead of thinking about CSR as a separated value adding construct, managers should start thinking about embedding CSR into the core of their businesses to create value and thereby actively moving towards CSR 2.0. CE is one example of a sustainable business model that tries to enhance all aspects of the triple bottom line by reducing waste and limiting resource usage and thus creating economic, social and environmental returns. Probably far from perfected but very easy to imagine, Jonker, Tap & Straaten (2012) explain that the concept of CE is built around the fact that “Money is not the only way of

transferring economic value anymore. Access to goods and services is sometimes more important than owning them.” (p.26). CE is often linked with product service systems (PSS). As (Tukker, 2013) describes

(17)

in his review article on PSS several internal and external factors also contribute to the failure or success of such a concept. According to Yuan, Bao, & Verbeke (2011) Strategies to integrate CSR in prevailing business activities depend on a threefold fit (external consistency, internal consistency, coherence). Focusing on either one out of three will leave the other two unaddressed thus leading to suboptimal CSR performance. They propose a core-periphery perspective to CSR initiative adoption where managers should ask themselves if the addition of CSR initiatives will complement or obstruct with core or peripheral business routines or act independent of these and whether they can be developed internally or externally and ultimately lead to increased triple bottom line performance. The core-periphery perspective is more aimed at incremental improvement and CSR in general, instead of radical improvement when transforming the business model and is therefore out of scope of this thesis.

2.5 Barriers to sustainable business model innovation

Barriers to business model innovation in existing firms have been identified in literature. Firstly, barriers originating from a political nature have been suggested where managers resist business model innovation because the new business model might conflict with existing assets or investments (Christensen & Raynor, 2003) (Amit & Zott, 2001). Secondly cognitive barriers have been suggested which originate from the concept of dominant logic. Dominant logic can be considered an information filter where only ‘relevant’ data is considered for organizational learning and all additional information is ignored (Bettis & Prahalad, 1995). The same principle might apply for sustainable business models. If an existing business model was successful in the past, or still is, managers tend to prefer the old way of doing business over experimenting with new business models. This approach might lead to missed opportunities because potentially valuable other uses of existing technology is missed (Chesbrough & Rosenbloom, 2002). Thirdly Jonker, Tap, & Straaten (2012) find that government support is still lacking in the transition towards a so called green or blue economy which forms a barrier to sustainable

(18)

value creation from a triple bottom line perspective. Governments can effectively block innovation through a lack of subsidization because their thought process is geared towards economic transactions. External barriers are out of scope in this thesis and are therefore not investigated further. Finally they find a barrier in the form of uncertainty where a tendency exists to always wait on the next opportunity or next technology before being willing to make the switch towards sustainable business models (Jonker, Tap, & Straaten, 2012). This barrier is similar to the concept of dominant logic as explained by bettis & Prahalad (1995) and is therefore combined. In addition to the three types of barriers already mentioned, opportunism might have a moderating influence on the existing barriers to sustainable business model innovation.

To limit the scope of this thesis, an agency theory perspective was chosen to define the antecedents of opportunism in relation to sustainable business model innovation. Agency theory is most relevant in situations where contracting problems are difficult (e.g. goal conflicts, outcome uncertainty, difficult evaluation of behavior) (Eisenhardt K. , 1989). In agency theory the main unit of analysis is the contract of work between the principal and the agent. The principal is the one delegating the work to the agent who is the one performing the work. Agency theory has specific assumptions about human behaviors (e.g. self-interest, bounded rationality, risk aversion) and assumes information asymmetries exist between principal and agent (Eisenhardt K. , 1989). This thesis explores the barriers to business model innovation and their relation to the basic assumptions on human behavior as proposed by agency theorists. Bounded rationality, risk aversion or entrenchment might all contribute to the cognitive or political barriers. Bounded rationality poses that “human behaviors in organizations are intendedly

rational but only limitedly so” (Simon, 1961) and implies that individuals simply do not understand how

certain changes can lead to value. Another aspect of bounded rationality has to do with the limited capacity of individuals to absorb new information. Increased pressure due to business model innovation might be too much for individuals to enable learning from it. It is also possible that individuals perceive

(19)

the current business model as being ‘good enough’. In other words, individuals might focus a firms’ business model on satisfying and simplifying the tasks at hand to create value which is another form of opportunism. Risk aversion is a third factor of opportunism. It is possible that the new business model does not fit the skills, expertise and experience of individuals resulting in a preference to stick to the old business model. The final assumption of agency theory has to with information. Agency theory poses that agents have access to information is costly for principals to obtain, leading to information asymmetries between principal and agent. In the case of business model innovation this might lead to suboptimal performance of the new business model.

A big challenge to embedding CE is to enhance cooperation. This also connects well with the findings of Jonker, Tap, & Straaten, (2012) as described before. “The CE is not a strategy you can pursue alone. It

requires relationships with recyclers, retailers, consumers, resource providers, regulators and so forth: basically, everyone involved in a company’s value chain, from start to finish” (The Guardian). This is why

an agency perspective is so important to consider as stressed in the article of Eisenhardt (1989) when studying problems having a cooperative structure.

Based on the aforementioned literature, the following propositions are derived:

Proposition 1: Political barriers to sustainable business model innovation exist and create a drag on

the successful implementation and performance of the new sustainable business model.

Proposition 2: Cognitive barriers to sustainable business model innovation exist and create a drag on

the successful implementation and performance of the new sustainable business model.

Proposition 3: Opportunism has a moderating effect on the barriers to sustainable business model

(20)

2.6 Individual Motivation

In this chapter a thorough review is given to display the potential impact motivation can have specifically related to sustainable business model innovation.

A motive is a reason for doing something. Motivation is about those factors that influence people’s behavior (Armstrong, 2006). The three main components of motivation; direction, effort and persistence are described by Arnold, Robertson, & Cooper (Psychology). Individual motivation has been researched extensively in the last century. Herzberg, Mausner, & Snyderman (1957) identified two forms of motivation; intrinsic and extrinsic motivation. Intrinsic motives originate from inside an individual and influence their behavior and actions and can be highly differentiated between individuals. The extent of feeling responsible and the level of autonomy can influence how intrinsically motivated a person is to achieve a target. Extrinsic motivation originates from the outside; for example from an organizational level and is about motivating a person or group through extrinsic means. Two examples of extrinsic motivation are monetary incentives or disciplinary action (Armstrong, 2006, p. 254). This thesis will explore how individuals are extrinsically motivated to change with the new sustainable business model.

Motivation of employees in teams is another stream of research which has been investigated extensively. The process of designing and implementing a new business model is not something that only affects single individuals. Rigourous planning and investigation has to take place to gain enough evidence to show that a new business model can work. How do firms make sure that employees are working efficiently and are contributing equally to the process of business model innovation? Bridoux, Coeurderoy, & Durand (2011) describe two motivations to cooperate in a team setting. Teams contain self-regarding individuals and reciprocating individuals. One can assume that both types of individuals will always be present in teams, however sometimes one of the two groups is more represented than the other. This will have an impact on how motivated team members are, how well they can work

(21)

together and how to best deal with extrinsically motivating teams. Team motivation is outside the scope of this thesis but might prove a worthy topic for further research.

It is clear that motivating employees to pursue business model innovation does not purely lie at the level of top management. In essence, successful business model innovation is a balancing act of all individual, intra-organizational and extra-organizational motives. It is very possible that when similar firms are exploring similar new sustainable business models, one firm is successful where the other is not. So what can cause these two different outcomes? Of course every company is unique and it’s not difficult to imagine a multitude of causes that eventually can lead to different outcomes. The drivers and barriers to business model innovation described in the previous chapter obviously influence the decision. However how these drivers and barriers are perceived by individuals involved in the decision making process will also depend on previous experience, intrinsic motivation and extrinsic motivation, especially considering the lack of empirical scientific evidence that embracing sustainable business models is good for business.

Managers often do not like to experiment with new sustainable business models because new business models generally do not lead to immediate performance increases (Chesbrough, 2010). The difficulty here lies in its uncertainty. These kinds of changes require long term commitment (Jonker, Tap, & Straaten, 2012) but do these new business models really pay off in the long term? Does it pay to be green? Such questions directly influence individual motivation because it limits and individual’s ability to set clear goals and have clear expectations of the process to achieve these goals, and thereby their level of intrinsic motivation (Armstrong, 2006, p.252). Another problem arises when we consider that often performance appraisals of employees are based on relatively short term performance and do not immediately change with the new business model. Monetary incentives based on short-term performance can lead to very motivated employees for limited time to achieve certain targets but

(22)

generally have less impact on the long-term. Therefore it seems imperative for an organization to investigate whether a certain business model innovation with a long-term focus would fit the needs and expectations of employees before experimenting with such a new business model (deCotiis & Summers, 1987) because it can intrinsically motivate employees and thereby have a higher chance of creating value for the company.

Based on the aforementioned literature, the following proposition is derived:

Proposition 4: a lack of fit of extrinsic motivation schemes with the new sustainable business model

increases opportunism leading to suboptimal performance of the new sustainable business model.

2.7 Effectuation

It is clear that the road to successful sustainable business model innovation is paved with challenges and uncertainty. Chesbrough (2010) argues that business model innovation can only occur through processes of experimentation, effectuation and organizational leadership. Mapping new business models is not where the main difficulties lie, but going from the mapped model to the implemented model is extremely challenging due to the structural and behavioral changes needed as described before. Experimentation, if done right, can help discover the right business model and potentially lead to new opportunities (Chesbrough, 2010). Secondly, effectuation is a vital thought process needed to be able to deviate from the dominant logic of the existing business model (Chesbrough, 2010). Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means (Sarasvathy, 2001). When this is taken back to the level of the business model it will allow managers to quickly map alternative business models and the likely implications of each one. Instead of taking a causation approach and thoroughly analyzing all the predetermined factors needed for the implementation of a pre-determined new business model, managers should instead experiment with arising new business models and learn as they go which business models lead to

(23)

optimal results. This is another reason why the case selected is relevant. Several years of experimentation and pilot projects have led to an extensive body of knowledge on the challenges and solutions in the process of transforming Philips’s business model.

Proposition 5: Effectuation has a moderating effect on opportunism leading to a decrease in

opportunism.

2.8 Leadership

Change management is another vital component for changing the business model of already existing organizations (Chesbrough, 2010). Conflicts between old and new business models can easily occur, especially since there will always be a transition period between two business models. Who is best to lead this change will differ from firm to firm, depending on the barriers to business model innovation. Doz & Kosonen (2010) ask themselves how CEOs and their leadership teams can radically accelerate the evolution of their business model. Successful business models lead to a certain amount of rigidity in the firm and this is exactly where the problem lies in a highly competitive global landscape where flexibility and constant adaptation are needed to remain competitive. This problem can easily be linked to the concept of dominant logic discussed earlier. They go on by stating that inherently, stability is required for a firm to achieve high levels of efficiency and to be able to exploit economies of scale, but it might effectively limit “strategic agility and thus its ability to renew and reform itself” (Doz & Kosonen, 2010, p. 371). They also show that successful business model renewal and transformation is one of the main outcomes of strategic agility. To achieve strategic agility, three meta-capabilities of top management are needed. Firstly leaders need to be strategically sensitive which means leaders have “the sharpness of perception and the intensity of awareness to strategic developments” (Doz & Kosonen, 2010, p. 371).

(24)

decisions, without being bogged down in top-level ‘win-lose’ politics” (Doz & Kosonen, 2010, p. 371). Thirdly, resource fluidity is of major importance, which is “the internal capability to reconfigure capabilities and redeploy resources rapidly” (Doz & Kosonen, 2010, p. 371). Their research sheds light specifically on what top management can do to make a company more strategically agile so that new business models can be more successfully implemented. The question is to what extent this applies to our case and how top management supports sustainable business model innovation.

Proposition 6: Top management has a moderating effect on opportunism leading to a decrease in

opportunism.

2.9 Strategy

Extant research warns that developing a successful business model is not enough to assure competitive advantage (Teece, 2010). New business models are often highly transparent and easy to imitate. Successful business models can be shared between competitors, thus a clear distinction between business models and strategy should be made. Instead, business models and strategy should be two complementary constructs. “Coupling competitive strategy analysis to business model design requires

segmenting the market, creating a value proposition for each segment, setting up the apparatus to deliver that value, and then figuring out various ‘isolating mechanisms’ that can be used to prevent the business model/strategy from being undermined through imitation by competitors or dis-intermediation by consumers” (Teece, 2010). The business model is designed to provide a path to value creation and a

strategy enables longer-term value appropriation by making sure barriers to imitation exist. Managers have to consider not only which business model might work best, but also if they can shield the beneficiary effects of the new business model by implementing strategy that cannot be copied easily. To limit the scope of this thesis, strategy is not explicitly linked to sustainable business model innovation.

(25)

However, interviews will still include questions about the perceived fit with the overall company strategy and how individuals feel sustainable business model innovation can contribute to a competitive advantage for the company.

3. Research Questions

This exploratory study seeks to answer two main research questions:

1) What are the barriers to sustainable business model innovation in high-tech firms?

2) Does opportunism have a moderating role on the barriers to sustainable business model innovation?

4. Conceptual model

Individual Opportunism

Drivers to change

Barriers to change Sustainable business model Innovation Product & Process innovation Effectuation Top Management Extrinsic Motivation Self-Interest Bounded Rationality Risk Aversion Information Asymmetries Traditional Business Model

(26)

5. Data and Methodology

In the following chapter the research methodology will be explained to explore the main research questions. The end goal of this thesis is to add to the knowledge on how high-tech firms can successfully overcome the challenges that lie ahead in sustainable business model innovation. The controversial influence of opportunism on the existing barriers makes this a particularly interesting, but potentially volatile topic for research. Great care has to be taken to ensure an ethical approach to this study. Extant research has focused on organizational barriers to business model innovation, however, individual motives have not been investigated in depth, although some articles hint towards opportunism as a moderating influence in the decision making process.

5.1 Description

To the knowledge of the author this is the first time that the barriers to sustainable business models and their dependence on opportunism are investigated. Due to the lack of previous studies on this topic, an inductive exploratory case study approach was selected with some deductive components. Initially the idea was to conduct a multiple case study to enable comparison between cases, leading to literal replication which enforces the validity of outcomes (Yin, 2009). A multiple case study also allows “more

robust, generalizable and testable theory than single-case research” (Eisenhardt & Graebner, 2007,

p.27). Unfortunately it was extremely difficult to get the required access in other companies within the short time span, in particular gaining access to key people, which made it impossible to do a multiple case study. Therefore, after consulting with the thesis supervisor, it was decided to do an in-depth single case study on the efforts and experiences of individuals in the organization to implement new sustainable business models based on a CE. The main unit of analysis is the individual. These respondents needed to be involved with sustainable business model innovation, which enabled the researcher to focus on perceived motivation. Finally, triangulation of sources should lead to a deeper

(27)

understanding of the topic (Saunders, Lewis, & Thornhill, 2012), hence multiple sources of secondary data were analyzed (i.e. brochures, internal documentation, online information)

According to (Yin, 2009) case studies apply best in research where “how or why questions need to be

answered” (p.2). Secondly case studies apply in situations where “the investigator has little control over events” (p.2), and thirdly where “the focus is on a contemporary phenomenon within a real-life context” (p.2). The first and second criteria apply since the case company is a firm that is, and has been for

several years, extremely active in attempting to embed sustainability in their strategy and business models. The third criterion was elaborated upon in the literature review, where increasing relevance of sustainable business model innovation in the past decade was highlighted. Yin (2009) also stresses the importance of context as an aspect that justifies the use of a case study. Especially since it was not possible to conduct a multiple case study, a thick description was needed with a specific focus on context. In this thesis the context of a high tech global firm was chosen and explored through the use of interviews and secondary data. This context can play an important role in the perceived barriers and individual motivation to sustainable business model innovation and leaving it out might lead to an incomplete or biased picture of the phenomenon.

To ensure a rigorous research design relevant companies needed to comply with specific criteria. Firstly the companies needed to be experimenting with new sustainable business models. Secondly, these companies needed to serve a similar sector of consumers or firms. Thirdly these companies needed to be implementing a similar business model innovation (i.e. based on CE, base of the pyramid, microfinance). Lastly these companies needed to allow access to relevant managers, employees and documentation. Cases and respondents were selected with the help of the CEO of Impact Academy. Impact Academy organizes educational and development possibilities for CSR professionals (Moratis, 2013). This platform provided the needed insight into which companies were experimenting with

(28)

sustainable business model innovation and in what ways. Vodafone and Interface were contacted for interviews but unfortunately resulted in very limited response. Therefore the decision was made to proceed with a single case study on Royal Philips N.V. and invest all available time and resources into this single case.

5.2 Case Description:

Philips is a company that takes pride in its long lasting track record in bringing highly successful (and profitable) innovations to the market. Its mission is “to improve people’s lives through meaningful

innovation”. Philips is a global company with 4 main business units; Healthcare, Consumer Lifestyle,

Lighting, and Innovation Group & Services. Healthcare and Lighting serve mainly b2b markets. As the name already implies, Consumer Lifestyle is mainly b2c oriented. Nonetheless, all three business units serve both types of markets to some extent and each business unit is sub-divided into separate business groups with a specific focus as can be seen in figure 1.

(29)

For several years Philips is trying to reinvent its business model moving away from offering products to offering services. It is also trying to put an emphasis on sustainability performance by trying to implement new business models based on CE. CE is a way of thinking that fits well with a strategy focused on offering service solutions because it enables a different way of doing business with a customer. Its main goal is to

transform the linear business model towards a circular business model to enable closing of material loops. Four levels of value retention were defined from highest to lowest value retention: Service & upgrade, Refurbishment, Parts Harvesting, Recycling. In addition, four enablers were identified; Design, Collaboration, New Business models, Reverse Supply Chain (Philips, 2015) as can be seen in figure 2.

Managers from several business groups have been interviewed with special attention to the Group Innovation (Philips Research) and Healthcare business units. These groups were selected because the healthcare business has the most experience with CE and Group Innovation typically plays a big part in enabling innovations. More specifically, respondents from the imaging systems business group, personal care, healthcare, research, design and the sustainability office were selected for an interview to be able to get specific business related viewpoints right from the source and to be able to triangulate results

(30)

Philips Research is part of the group innovation business group and is structured to serve the different business groups and to feed the innovation pipeline with new inventions. Philips Research is funded in two ways. Firstly, business groups fund specific research projects annually where a budget is defined each year to solve specific consumer problems defined from business cases of the business. Second, Philips Research also has internal funding where promising opportunities are explored further to bring new innovations into the technology pipeline.

5.3 Research Instruments and Procedures

The main research methods used were structured interviews and document analysis. The semi-structured interview style allowed the researcher to explore certain topics, but also enabled the researcher to dive deeper into interesting experiences as they appeared. The main data sources were the managers and employees involved in the process of business model innovation and sustainability reports, brochures and other internal documentation. Seven interviews were conducted, making sure to include several important disciplines, which limited personal bias (Eisenhardt & Graebner, 2007). The author started with a strategic designer who was hired after graduating on a CE related topic in Philips Design the previous year. This person was heavily involved in pitching his findings to all kinds of internal stakeholders so it allowed the researcher to use a snowball method of referrals to reach the most relevant people in the organization. Due to the sensitive nature of this study and its focus on individual experiences this method is particularly applicable (Biernacki & Waldorf, 1981). Secondly it made the recruitment process very efficient. See table 1 for the different job positions and business units.

(31)

Respondent 1 Strategic Designer Design

Respondent 2 Program Manager Sustainability Office

Respondent 3 VP Research Healthcare

Respondent 4 Director Sustainability Office

Respondent 5 Program Manager Healthcare

Respondent 6 Director Healthcare – Installed Base

Respondent 7 VP Research Devices & Electronics

All interviews were recorded and transcribed afterwards. Interview topics focused on the 6 propositions that were formed during the literature review. Before each interview prompts were prepared to guide the interview in the relevant direction. For an overview of interview questions, please see appendix 1.

After receiving new names of potential respondents the researcher would send an email with a brief description and a request for an interview. If the potential respondent accepted the invitation an interview would be planned. Confirmation of consent was asked before each interview (Tracy, 2010) and recorded transcripts were sent to the respondents afterwards to give them the opportunity to make changes and agree with the final content. Interviews started with an easy introduction and were followed by so called grand tour questions (Leech, 2002). This generally put the interviewee at ease and allowed the researcher to gain insight in the main activities & responsibilities of the respondents. Due to the exploratory nature of this study, the researcher generally allowed the respondents to elaborate on their personal experiences. As long as the pre-determined topics were discussed the researcher would try not to steer the interview too much. The more difficult questions were asked later in the interview, and when needed specific examples were asked for a complete picture. Interviews lasted between forty and sixty minutes to make sure enough data could be collected but the focus of the interview was not

(32)

some confidential material which was coded before data analysis. The final report was checked by Philips’ director of sustainability reporting before publishing to make sure no confidential or unwanted information remained in the document.

5.4 Data Analysis

After transcribing the interviews, all the raw data was imported into CAQDAS software (NVivo 10). By doing early interim data reduction process the researcher gained new insights which could then be tested further in the data collection process (Miles & Huberman, 1984). The researcher made sure to import basic attributes of each participant as source classifications (age, years at company, job position, department, etc.). This allowed comparison per attribute during the analysis phase.

5.5 1

st

_{cycle coding}

1st cycle coding started with an initial coding list in which first impressions of the researcher were coded. Initial coding is a way to limit personal bias towards certain theories (Charmaz, 2006) and to get familiar with the coding process. When reading the transcripts a second time the researchers’ focus was put on conflicts and contradictions as recalled by the participants, which is a form of versus coding (e.g. customer vs. organization, student vs. employee, priority vs. goal etc.) These codes would highlight interesting contradictions in the data. Finally the researcher went over the transcripts a third time employing a descriptive coding method, explicitly summarizing important information in codes (Saldana, 2009) (e.g. dominant logic, self-interest, complementarities). For a full list of codes used in 1st cycle coding please refer to appendix 2. In total 119 codes were assigned to 415 references during 1st cycle coding of the 7 interviews.

(33)

5.6 2

nd

_{Cycle Coding}

The previously described exercise produced an extensive list of codes. To be able to do meaningful analysis, the initial coding list was reduced to a smaller number of overarching ‘focus’ codes or categories (Miles & Huberman, 1984). During 2nd cycle coding, secondary data sources were added. This allowed the researcher to develop the “most salient categories” and make “decisions about which initial

codes make the most analytic sense” (Charmaz, 2006, pp. 46-47). Secondly, a method called pattern

coding was used where the goal was to detect patterns between codes. The linkages between the category codes could then be extrapolated into themes and concepts at a later stage, which eventually lead to generalizable theories (Saldana, 2009). To achieve this, a combination of deductive and inductive approach was chosen. The deductive part was influenced by theory, for instance the barriers to business model innovation described in literature were coded as categories (e.g. political barriers, cognitive barriers, asset specificity etc.). All related codes were merged into the applicable category code. The inductive part of the analysis allowed the researcher to create new and more specific categories, which were not identified during the literature review. Eventually the 119 1st cycle codes were reduced to 16 descriptive category codes and 178 relevant references that allowed insight in the research questions and propositions (e.g. barrier.dominant_logic, barrier.access to information, opportunism.self-interest). For a complete list of 2nd cycle category codes see table 2 .

(34)

To get a first impression of which code categories were mentioned most and which least, the code categories were ranked in a matrix and sorted on the number of references and the amount of sources they were referenced in. For instance: ‘Dominant logic’ was a barrier that was perceived in all sources and also included the most references. This is an indication that this barrier is very important in the process of sustainable business model innovation. By sorting the data in this way it helped the researcher to get a clear overview of quotes related to the propositions and research questions.

The final step of the analysis involved going over the different codes and developing theories that would explain the research findings. These were reported in the results section of this thesis.

Nodes Number of coding references Number of items coded

Nodes\\2nd cycle\p2 Cognitive Barriers\Dominant Logic 26 9

Nodes\\2nd cycle\p2 Cognitive Barriers\Access to information 17 8

Nodes\\2nd cycle\p4 Effectuation 16 7

Nodes\\2nd cycle\Strategy 15 6

Nodes\\2nd cycle\p1 Political Barriers\Efficiency 13 4

Nodes\\2nd cycle\p1 Political Barriers\Complementarities 12 5 Nodes\\2nd cycle\p2 Cognitive Barriers\Diverging Interests 12 6

Nodes\\2nd cycle\Product & Process Innovation 12 6

Nodes\\2nd cycle\p3 Opportunism\Bounded Rationality 11 7

Nodes\\2nd cycle\p7 Extrinsic Motivation 11 6

Nodes\\2nd cycle\p1 Political Barriers\Asset Specificity 10 5

Nodes\\2nd cycle\p3 Opportunism\Self-Interest 10 5

Nodes\\2nd cycle\p5 Top Management 8 5

Nodes\\2nd cycle\p6 Intrinsic Motivation 8 5

Nodes\\2nd cycle\p3 Opportunism\Risk Aversion 6 3

Nodes\\2nd cycle\p3 Opportunism\Information Assymetries 3 2

(35)

5.7 Strengths

As argued by (Tracy, 2010) good quality qualitative research should involve a worthy topic, rich rigor, sincerity, credibility, resonance, significant contribution, ethics and meaningful coherence. These different criteria were continuously reconsidered at every stage of the research. Triangulation, in addition to regular peer reviews and reporting on the chain of evidence was used to ensure construct validity (Gibbert & Ruigrok, 2010). Internal validity was achieved by using a rigorous theoretical framework to compare the collected empirical evidence with and use triangulation to verify findings by adopting multiple perspectives (Yin, 2009). External validity was achieved by selecting cases based on discussions with experts, ensuring generalizability of outcomes from multiple cases. (Gibbert & Ruigrok, 2010).

(36)

6. Results:

To answer the first research question a thorough analysis of the perceived barriers to sustainable business model innovation took place. The literature review suggested barriers to business model innovation based on political and cognitive limitations (Chesbrough, 2010). These types of barriers formed an easy starting point of the analysis. To make these barriers more specific for our case and to get an indication of their prevalence in the case of sustainable business model innovation compared to business models without a specific triple bottom line focus, interviews and secondary data were analyzed.

To answer the second research question great care was taken to make sure opportunism was analyzed objectively and anonymously. The first step involved assessing the prevalence of agency theory’s main assumptions on human behavior in organizations. The goal of this analysis was not to come up with a specific solution to the opportunism problem, but to assess if the problem actually existed to a significant level in the case of sustainable business model innovation, so recommendations for future research could be made.

To avoid confusion in the following paragraphs the author will refer to a specific example of a sustainable business model, namely a circular business model. In the discussion section the results will be generalized to reflect on the topic of sustainable business models.

(37)

6.1 Political Barriers to Circular business model innovation

Political barriers to business model innovation can originate from decision making rationale based on economic arguments. As described before, conflicts with the existing business model, i.e. asset specificity or ongoing financial investments can create a drag on, or even block the activities needed to successfully transform a firm’s business model. In-depth analysis of the perceived political barriers allowed the researcher to identify several political barriers in the case of circular business model innovation.

6.1.1 Asset Specificity

Asset specificity can occur in situations where resources or capital have been committed to perform specific activities in the firm’s value chain. These investments cannot be assigned to other activities at least for the duration of the ongoing activities without considerable loss, effectively creating a lock-in situation for the firm. Five respondents perceived barriers based on asset specificity.

Philips has a long standing history of innovation and has even embedded this into their mission by trying to “improve people’s lives through meaningful innovation” (Philips, 2014). The company has always invested heavily in innovation to gain a competitive advantage over competitors and now seeks to couple it with environmental and societal gains.

Philips Research is the main part of a separate business unit that operates as a partner to the business to provide new innovation to the three overarching business units; Consumer Lifestyle, Lighting and Healthcare. Research projects are either funded by these three business units based on specific business cases, or internally by Philips Research based on exploring promising opportunities for future technologies. In the latter case the risk for the research organization is much higher compared to the former, since it is not known ex-ante whether the unexplored opportunity can lead to a relevant

(38)

business case ex-post; however exploring uncharted territory also has a higher probability of finding truly disruptive innovations.

A first cause of asset specificity existed due to the way Philips Research is embedded in the organization. Sometimes it is difficult for Philips Research to know when to fund projects internally and when to rely on the business for funding. Ideally a clear business case exists before work in Philips Research commences but as explained before this is not always the case. Committing resources in one place prevents committing resources in other places, leading to asset specificity. Hence the hesitation for Philips Research to fully commit to circular business models seems logical since business support is lacking and resources are limited. Three out of seven respondents reported a lack of research involvement based on a lack of business support.

“On the one hand I think Philips Research has projects that are started internally. On the other hand they work on projects as requested by the business. If CE is not sufficiently on the roadmap of the business unit it becomes harder for Research to work on it because it involves spending a lot of funds while nobody is asking for it” – Respondent 4

“Research can play a role in the preparation of new designs, new tools to calculate things but this request does not seem to come from the business. So this leaves us with the chicken and the egg story. The business needs to be convinced of the relevance of CE before Research starts investigating it, but Research needs to convince the business of its relevance before the business starts believing it. Hence the investment of Research is still limited and they are constantly asking whether it is relevant now.” – Respondent 2

Key decision makers in Philips Research are wondering how Philips Research can play a role in enabling business model innovation in the first place, due to the inherent focus on product and process innovation that is currently the case.

Towards sustainable business models : investigating the barriers to sustainable business model innovation and the role of opportunism : an agency theory perspective