Taking a Paradox Perspective on the Coevolution Between Traditional and Sustainable Business Models

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Taking a Paradox Perspective on the

Coevolution Between Traditional and

Sustainable Business Models

Master Thesis

January 2020

Author:

Niklas Endregat

Student Number:

2969777

Supervisor:

Dr. B. J. W. Pennink

Co-Assessor:

Prof. Dr. T. Halaszovich

Word Count:

14,084 words

Faculty of Economics and Business

University of Groningen

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ABSTRACT

This research aims to rectify a paucity in current research and investigates the coevolution of traditional and sustainable business models under one corporate roof. Through a paradox lens, firms’ solutions and mechanisms to cope with the paradoxical situations that arise throughout the coevolution are determined and analyzed. This is executed conducting seven case studies of Western-European firms, consulting firms, and governmentally owned consulting institutions. Results show the array of responses firms deploy to address paradoxical areas of competing demands of economic, social, and environmental foci, organizational culture and mindset, training and staffing, resource allocation, and the stakeholder environment during the coevolution of traditional and sustainable business models, and four different coping strategies are derived from the data.

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PREFACE AND ACKNOWLEDGEMENT

This research is my exploratory take on shedding light onto the coevolution of traditional and sustainable business models within corporations. It uncovers firms’ array of responses to the paradoxical areas involved in the coevolution and develops four coping strategies. I invite readers to critically reflect on this research.

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1. INTRODUCTION

Our planet is radically changing, and long-term challenges such as climate change, pollution, and raw material scarcity (Montalvo et al., 2006) are calling for a new logic concerning the treatment of social and environmental topics in the world of business models. In their seminal article, Porter and Kramer (2011) introduce the concept of shared value creation; a concept that addresses the shortcomings of the traditional ways in which business is conducted. They infuse an extended view on the priorly incumbent economic-focused business models by extending the perspective by social and environmental components. However, as Rangan, Chase, and Karim (2015) highlight, the implementation of shared value into companies’ traditional business models is still far from being the norm.

A traditional business model, despite still being an emerging concept (Teece, 2010), can be seen as a notion that encompasses a specification on how a business (i) proposes value to customers, (ii) creates this value, and (iii) how the cost and revenue structure is organized, ergo the value capture component (Boons et al., 2013). Traditional business models have a strong economic value creation focus by default (Porter and Kramer, 2011). In the light of increasing awareness that firms ought to have responsibilities beyond mere economic value creation, the literature on sustainable business models has seen a surge of interest (Dentchev et al., 2018). Sustainable business models, emerging from early advances of authors such as Elkington (1997), incorporate social, environmental, and economic foci equally in their approach (Bansal, 2005; Schaltegger & Wagner, 2011). Sustainable business models thus incorporate (i) sustainable value proposition beyond its customers, including all stakeholders, (ii) a value creation that benefits all involved stakeholders, and (iii) how economic value is captured while simultaneously at least maintaining social, economic, and environmental value throughout the spheres of companies’ operations (Lüdeke-Freund & Dembek, 2017; Schaltegger et al., 2016).

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7 sustainable business models remain a black box (Dentchev et al., 2018). In order to address this gap, this research will explore the following research question:

How do traditional and sustainable business models coevolve within multinational firms?

The research question will be answered through the infusion of a paradox lens. According to the paradox view, organizations have to address seemingly opposing goals and demands throughout the course of their existence (Smith & Lewis, 2011). Traditional business models and sustainable business models, given their contrary foci, are to be seen as opposing poles on a continuum (Biloslavo et al., 2018), as they represent a “persistent contradiction between interdependent elements” (Schad, 2016: 6), which is the definition of a paradox. During the coevolution of traditional and sustainable business models, specific paradoxical situations may occur, and need to be addressed (Vladimirova et al., 2017). Hence, the research question will be answered by analyzing the following five sub-questions representing five paradoxical areas:

a. How do firms address the paradox of competing demands?

b. How do firms address the paradox of organizational culture and mindset? c. How do firms address the paradox of training and staffing?

d. How do firms address the paradox of resource allocation?

e. How do firms address the paradoxical situations arising in the stakeholder environment?

By bridging this gap, the contribution of this paper is twofold. Firstly, it generates insights into the coevolution of traditional and sustainable business models within a firm and helps further developing the integration of the fragmented fields by analyzing the issue through a paradox lens. This paper uncovers the array of responses firms deploy to address paradoxes during the coevolution and establishes four coping strategies. Secondly, it informs practitioners of best practices on the management of both traditional and sustainable business models under one corporate roof simultaneously.

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8 the findings are being discussed and linked back to literature. This paper concludes with limitations and avenues for future research.

2. LITERATURE REVIEW

2.1 The Neoclassical View of the Firm

The contemporary logic of the firm builds upon neoclassical theory (Stormer, 2003), which dictates the success of the firm expressed through the maximization of profit to its shareholders. A firm would only engage in reforms, be it in the ecological or social arena, if mandated by legislative changes, for the purpose of legitimacy retention, or if it serves the organization’s own agenda (Purser, Park, & Montouri, 1995). Following this logic, externalities like waste or pollution are not taken into account, which encourages firms to engage in a make-to-throw-away approach rather than sustainable use of resources (Shrivastava, 1995). In the neoclassical view, ambitions to pursue sustainable goals are seen to be inferior to the principal target of achieving economic value maximization (Freeman & Gilbert Jr., 1992).

2.2 The Concept of a Traditional Business Model

Based on the premise of economic goal supremacy, the emergence of the traditional business model started in the late 1990s (Alt & Zimmerman, 2014). Due to the diverse usage of the term in a variety of different fields, and the nature of BMs being an emerging concept (Boons & Lüdeke-Freund, 2013), the necessity arises to elaborate on the concept first, and subsequently find consensus on a definition. Similarly, Teece (2010) highlighted that there is a paucity of theoretical grounding within the business literature.

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9 a value proposition, which refers to the interconnection of exchange between a firm and its clients and consumers. Secondly, it encompasses a particularization on the process of value creation, broadening the perspective towards the broader sphere of a firm’s operation. Lastly, a business model addresses the cost and revenue structure or value capture that defines the distribution among participants along the value chain.

Similarly, Boons and Lüdeke-Freund (2013) pinpoint four areas a business model displays, by extending the work of Osterwalder (2004) and Doganova & Eyquem-Renault (2009). A value proposition that defines the embedded value within products or services provided by an enterprise. Secondly, a business model outlines the arrangement of a firm’s supply chain, including the interconnection and interplay of upstream actors. Thirdly, the relationship to a firm’s customers is clarified, also encompassing the definition of a firm’s interaction structure with downstream actors. Finally, a business model determines a firm’s financial model stipulating the distribution of costs and revenues.

As a more recent development, Wirtz et al. (2016) recognized a convergence and integration of all three dominant literature streams concerning the business model concept. Contemporarily, authors refer to the business model as an abstraction of the company as a whole. They found that the development of a more homogeneous comprehension of the business model concept is taking place in the present research discourse. Hence, after an evaluation of the dominant literature concerning this topic, Wirtz et al. (2016) established the following definition of a business model, serving as a conceptualization for this paper:

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2.3 A Call for Sustainability - Beyond Mere Economic Value

Sustainability on the world stage started with the World Commission of Environment and Development (WCED) report Our Common Future (1987), which highlighted the need for a global action on social and environmental misconduct and issues in order to alleviate an unsustainable economic development. Sustainable development, defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987: 41), became a principal on the global leaders’ agenda. This report ultimately sparked the attention towards sustainable development, and paved the way for the Earth Summit, Agenda 21, the Commission on Sustainable Development, and ultimately the Agenda 2030 with the adoption of the Sustainable Development Goals (SDG) (United Nations, 2013; 2015).

With the seminal article of Porter and Kramer (2011) on shared value creation, the authors have taken these emerging thoughts on sustainability further, and the established focus of business models on the mere economic dimension has begun to shift significantly. By incorporating social and environmental elements in the priorly established economic focused business model, the concept of a sustainable business model (SBM) is emerging (Schaltegger et al., 2012).

2.4 The Concept of a Sustainable Business Model

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11 outlook. Through the incorporation of social and environmental elements in the incumbent economic-driven business model, the concept of a sustainable business model has begun to emerge (Schaltegger et al., 2012). Since then, the literature on the concept has progressed in a variety of ways.

Sustainable business models display, in an analogous fashion to traditional business models, a fragmented nature (Schaltegger, Beckman, & Hansen, 2013). Dentchev et al. (2018) identified four dominant approaches in their review on the contemporary developments within the field. The generalist approach to sustainable business models, analyzing the field from a holistic perspective, focuses on the empirical exploration and validation of new archetypes of sustainable business models (cf. Brehmer et al., 2018; Rossignoli & Lionzo, 2018). Secondly, the entrepreneurship and innovation-based approach concentrates on the potential for innovation to permeate existing business models with sustainability aspects through sustainable and social entrepreneurship (cf. Dobson et al., 2018; Davies & Chambers, 2018). Ternary, the technology-based perspective has been highlighted, which embraces technology and process innovation as a means to curtail social and environmental impacts (cf. Caldera et al., 2018; Hirscher et al., 2018). Lastly, Dentchev et al. (2018) introduce the behavioral approach to sustainable business models, which instills a management and sustainable behavior perspective to the field (Long et al., 2018; Wesselink et al., 2017).

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12 Considering the five core components the emerging field is in consent about (Lüdeke-Freund & Dembek, 2017), the definition of Schaltegger et al. (2016) mirrors these underlying constituents, and shall thus function as the definition for this research:

“A business model for sustainability helps describing, analyzing, managing, and communicating (i) a company’s sustainable value proposition to its customers, and all other stakeholders, (ii) how it creates and delivers its value, (iii) and how it captures economic value while maintaining or regenerating natural, social, and economic capital beyond its organizational boundaries (Schaltegger et al., 2016: 6).”

2.5 The Co-Evolution of Traditional and Sustainable Business Models

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Figure 1: The relationship between traditional business models and sustainable business models.

2.6 A Paradox Perspective: The Need to Combine Opposites

According to the paradox view, organizations will need to address seemingly opposing goals and demands throughout the course of their existence (Smith & Lewis, 2011). Traditional Business Models and Sustainable Business Models as displayed in Figure 1 above, have to be regarded as opposing poles on a continuum. Hence, they display a “persistent contradiction between interdependent elements” (Schad, 2016: 6), which resembles the definition of a paradox. The organizational realm entails a variety of paradoxes, with several being generic in nature, and others being organizational-specific. They find their roots in the unique history of an organization, its cultural context, and its goals and strategies that have been utilized by the organization through the course of its existence. Paradoxes may occur during several different levels of space and time within the organization (Biloslavo et al., 2018).

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14 organizing paradoxes become evident when convoluted systems offer a variety of ways to reach a desired goal, which are by nature competing, for instance, tensions between collaboration and competition or between routine and change. Lastly, Smith and Lewis (2011) identified performing paradoxes, which are a product of stakeholder plurality and their consequently competing demands and strategies on how to address them. Varying internal and external stakeholder demands and the resulting conflicts raise these paradoxes (Donaldson & Preston, 1995). However, these four categories may overlap, and influence each other, as paradoxical situations may be triggered by two different categories simultaneously (Smith and Lewis, 2011).

Figure 2: Four generic paradoxes. Adapted from Smith & Lewis (2011).

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2.7 Paradoxes in Co-Evolution of Traditional and Sustainable Business Models

The emergence of a paradoxical relationship occurs during the process of organizing, where two polar opposites arise within a given context - a pole and its opposing factor (Smith & Lewis, 2011). For many companies, an orientation towards sustainability resembles a constant process of friction and challenges that appears between internal and external stakeholders and their respective set of interests (Biloslavo et al., 2018). During the coevolution of traditional and sustainable business models, several areas that give potential for paradoxical situations arise (Vladimirova et al., 2017). An overview of these paradoxes can be found in Table 1 and will be discussed in more detail below.

Table 1. Different paradoxes occurring during coevolution.

No. of Paradox Paradox Name Short Explanation Authors 1 Competing

demands

Competing demands of economic, social, and ecological foci within one enterprise

Hart & Milstein (2003)

Rangan, Chase, & Karim (2015) Stubbs & Cocklin (2008) Schaltegger et al. (2012)

2 Organizational culture and mindset

Competing organizational mindsets and cultures per business model

Barquet et al. (2013)

Boons & Lüdeke-Freund (2013) Yu & Hang (2010)

3 Training & staffing

Different requirements related to the workforce engaged with the different business models

Barquet et al. (2013) Kianto, Sáenz, & Aramburu (2017)

4 Resource allocation

The allocation of different resources between

traditional and sustainable business models

Björkdahl & Holmén (2013) Chesbrough (2010)

5 Stakeholder environment

The impact of the coevolution on both the internal and external stakeholder environment surrounding the

corporation

Boons & Lüdeke-Freund (2013) Schaltegger, Lüdeke-Freud, & Hansen (2016)

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16 With respect to the paradox situation concerning the competing demands of traditional and sustainable business models, Hart & Milstein (2003) corroborate on how sustainability, although often described a factor au contraire to economic value creation, may be integrated and balanced, although a difficult task. In a similar fashion, Stubbs & Cocklin (2008) point out the difficulties of balancing the traditional, neoclassical perspective, and the ecological modernization perspective within firms. Schaltegger et al. (2012) also acknowledge the difficulties firms face between balancing the demand for economic fitness and the demands for social and environmental sustainability under one corporate roof. Rangan, Chase, and Karim (2015) enhance our understanding of the extent of implementation of sustainability into business models by introducing three ‘theaters’. Within these ‘theaters’ enterprises exhibit their alignment of sustainability with their business models. The first theater takes a philanthropic orientation, in which a direct enhancement of a firm’s performance, or a resulting return on investment is not required. This theatre is comprised of activities like the support of community initiatives, as well as contributions to civil organizations, both financially and commodally. Within the second theater, the enhancement of operational effectiveness is crucial. Existing business models are modified to enable a mitigation of impacts or the introduction of social and environmental gains while reinforcing efficiency and effectiveness throughout the value chain. Theater three requires an entire transformation of the traditional business model, where companies restructure both their entire purpose and operation to gear their efforts onto social and environmental matters. For this theater, an enlarged corporate performance is a required outcome. Table 2 summarizes the three theaters. Moreover, projects or initiatives may move from one theater to another throughout time.

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Table 2: The three different theaters. Adapted from Rangan, Chase, and Karim (2015).

Theater 1 Theater 2 Theater 3

Orientation Philanthropy

Operational Improvements Transforming of Business Models Objectives • Improve company’s social standing • Support company’s philanthropic priorities

• Deliver social and environmental benefits in support of company’s operations within existing

business models

• May increase revenue or decrease costs indirectly, but not main objective

• Programs create new forms of business geared towards addressing social and environmental issues • Improved business performance is required.

Examples Donations; Support for employee volunteering

Initiatives that reduce resource use or waste generation

Zero-waste production with simultaneous

ambitions to capture more market share

A second area of paradox arises in organizational culture and mindsets during the coevolution. Barquet et al. (2013) illustrate that it requires considerable time and resources in business model innovation to (re-)craft and harmonize organizational culture and mindset to fit. Similarly, Schaltegger et al. (2012) draw upon Stubbs and Cocklin’s (2008) notion of cultural factors that need to change in order to accommodate a sustainable business model, thereby highlighting the tension between incumbent and sustainable mindsets. In order to harmonize cultural and mindset-related tensions, existing literature highlights several avenues for rectification. Barquet et al. (2013) and Stubbs & Cocklin (2008) identify strong (top)leadership as a key factor, whilst Stubbs & Cocklin (2008) also acknowledge the possibility of value-aligned and inclusive corporate strategy.

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18 knowledge-based hiring and training are two pathways to remedy the paradox regarding staffing and training.

Concerning resource allocation, Barquet et al. (2013) elucidate that each firm which plans a business model transformation will have to critically consider its resource allocation among its business models. Björkdahl & Holmén (2013) underscore this notion with their findings, stressing the tension of resource allocation between new and old business models and organizational inertia that hampers smooth allocation. Even more extremely, Chesbrough (2010) highlights the potential threat of starvation of new business models, as the established, incumbent business model is generating the lion share of the firm’s profits. Two possible pathways to remedy this are the allocation of resources per business model in order to let both business models run self-sufficiently, or a gradual shift in resource from the traditional business model to the sustainable business model to facilitate growth (Björkdahl & Holmén, 2013).

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2.8 The Conceptual Model

The above-mentioned areas of paradoxical concern along the continuum of traditional and sustainable business models may occur in different points in time and reappear throughout the process. The five areas of paradox are graphically summarized in Figure 3 below, accompanied by pathways to rectify the paradoxical situations as outlined by the literature presented in Section 2.7.

Figure 3: Conceptual Model.

In order to shed light on how firms address these paradoxes, seven case studies have been conducted. A detailed overview of the cases selected, and the question guide can be found in Table 3 and 4, respectively, in Paragraph 3.1 and 3.2. The expectation is to refine the pathways that firms deploy to remedy the paradoxical situations as outlined in Section 2.7 and define fruitful paths-of-action throughout the five paradoxes.

3. METHODOLOGY

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20 interest of this research lies in the extension of an emerging theory, and this research pursues a research question that is asking a ‘how’ and ‘why’ question, that is geared towards establishing an understanding of the dynamics underlying the coevolution of traditional and sustainable business models, a case study design is chosen (Yin, 2003). Furthermore, the study is targeting a contemporary event, another criterion that favors a case study compared to other research designs (Yin, 2014: 9).

3.1 Case Selection

Case selection occurs based on theoretical sampling (Eisenhardt, 1989). Given the purpose of this study, it is aimed at the extension of an emergent theory. Hence, cases are selected upon the notion that organizations are experiencing paradoxical situations during a coevolution of both traditional and sustainable business models under one corporate roof. The selection is based on literal replication to gain and validate relevant insights into the research questions under study (Yin, 2014). The optimal number of the cases being selected was determined by saturation, ergo the point in the research process where no new insights are being gathered through additional cases under study (Jonker & Pennink, 2010).

A list of selected cases can be found in Table 3 below, and in more detail in Appendix 1.

Table 3. List of Cases.

Case Industry Location Label

Case 1 Energy/Power Producer Netherlands Business 1

Case 2 Food and Beverage, Hygiene and Personal Care Products

United Kingdom Business 2

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Case 4 Consulting Netherlands Consulting Firm 1

Case 5 Consulting Belgium Consulting Firm 2

Case 6 Consulting Sweden Consulting Firm 3

Case 7 Governmentally owned Consulting

Norway Government Consulting Firm 1

Furthermore, cases have been chosen from the following groups:

1) Businesses that are directly experiencing a coevolution of both traditional and sustainable business models under one corporate roof. This group will provide us with answers that are based on their direct in-house experience, and therefore validate our answers to consequently refine our conceptual model.

2) Private consulting firms that have designated departments dealing with sustainable business model transition and coevolution. This group will enhance our answers with more reliability, as they provide us with a birds-eye view of multiple sectors.

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3.2 Data Collection

After the initial conceptual model has been derived from existing literature, (phone) interviews serve as a data collection method to retrieve information from participants of the selected cases. To ensure a maximization of extractable information from interviewed participants, interviews will display an open fashion, in conjunction with a semi-structured interview approach. The interview guide can be found in Table 4 below.

Table 4. Interview Guide.

Section Question Literature Expectation

Introduction (…) N.A. N.A.

General information

What is your current position and how does your experience with both traditional and sustainable business models look like?

N.A. N.A.

Competing demands

1. How do you deal with

competing demands of economic, social, and environmental foci?

Hart & Milstein (2003) Stubbs & Cocklin (2008) Rangan, Chase, & Karim (2015)

To explore pathways for rectifying competing foci.

2. How do you ensure comparability of projects with respect to performance metrics?

Schaltegger et al. (2012) Stubbs & Cocklin (2008) Rangan, Chase, & Karim (2015)

To explore pathways for rectifying comparability of endeavors.

3. How do you address the potential issue of cannibalization of profit margins between the two models?

Hart & Milstein (2003) Schaltegger et al. (2012) To explore pathways for rectifying cannibalization of profit margins. Organizational mindset and culture

4. Have you experienced any difficulties with respect to organizational culture? How did you overcome this?

Barquet et al. (2013) Stubbs & Cocklin (2008)

To explore pathways for rectifying competing mindsets/cultures.

5. Have you introduced new internal behavioral norms or rules to harmonize the co-evolution within the firm?

Barquet et al. (2013) Stubbs & Cocklin (2008)

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23 Training and

staffing

6. How is staffing and the workforce affected by the coevolution?

Kianto, Sáenz, & & Aramburu (2017)

To explore pathways for rectifying competing interests in and demands from the workforce.

7. Have you introduced a learning platform, such as a training center?

Kianto, Sáenz, & & Aramburu (2017) To explore pathways for rectifying competing skill requirements. Resource allocation

8. In terms of resource allocation, how is this managed between the two models?

Barquet et al. (2013) Björkdahl & Holmén (2013) Chesbrough (2010) To explore pathways for rectifying competing resource demands. Stakeholder environment

9. How has the co-evolution affected the external stakeholder environment?

Boons & Lüdeke-Freund (2013)

Schaltegger, Lüdeke-Freund, & Hansen (2013)

Stubbs & Cocklin (2008)

To explore pathways for addressing competing interests in the external stakeholder environment.

10. Have you faced any resistance throughout your value chain throughout the process? How have you addressed potentially competing interests?

To explore pathways for addressing competing interests in the external stakeholder environment, specifically along the value chain.

11. How has the coevolution affected the internal stakeholder environment? How have you addressed potentially competing interests?

To explore pathways for addressing competing interests in the internal stakeholder environment. 3.3 Data Analysis

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24 1990). The data is first coded to describe, ergo data is organized into initial codes which are explained and defined in the context they have been encountered (Hennink, Hutter, & Bailey, 2011), which is then compared and categorized to develop theory, hence, to conceptualize (Hennink, Hutter, & Bailey, 2011). This process is also resembled by the terms open coding, axial coding, and selective coding. All three coding processes can be found in Appendix 3, 4, and 5, respectively. The open coding process entails the interview transcripts as well as the thick description of the codes.

3.4 Research Criteria

Data triangulation, that is the use of multiple data sources to ensure a strong weight of evidence, has been used to enhance validity and reliability in this research, as well as a closed chain of evidence as provided by the appendices (Guion, 2002; Jonker & Pennink, 2010; Yin, 2014). These different sources are resembled by the three different groups discussed earlier in this section. Furthermore, through the selection of stakeholders from different European countries, it is intended to further enhance the external validity of this research, as the conceptual model would be carried by findings that support each other on an inter-European level. Moreover, in order to infuse a higher degree of reliability, a case study database has been introduced, storing all transcripts, recordings, and other related documents (Yin, 2014). Additionally, to account for controllability and transparency of this study, the transcripts, interview guide, and coding procedure are available to the assessing entities (Jonker & Pennink, 2010).

4. EMPIRICAL RESULTS

This section will report the empirical data collected by interviewing the seven selected cases for this study. The aim of interviewing these seven cases was to gather evidence to provide further input for the exploratory conceptual model.

4.1 How do firms address the paradox of competing demands?

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25 4.1.1 Competing demands of economic, social, and environmental foci

Business 1 addressed the competing demands of economic, social, and environmental foci through a strong, overarching corporate strategy that aligns all foci, as both business units have

their targets to reach the, let’s say, overarching strategy. In both the traditional and sustainable

business model, sustainability targets are engrained, so the balance between economic, social, and environmental foci is balanced through integration. Business 2 similarly aligned these goals by engraining sustainability within their overall growth strategy and making it a mandatory part of doing business, since business growth models have to be sustainable, responsible, ethical,

competitive, at the same time. Sustainability drives economic benefits through cost reduction

across the value chain, satisfaction of consumer demands, and risk reduction in supply, since we

are strengthening our relationships with those who also believe in sustainable business development and who believe in sustainability, so then we also have longer-term contractual agreements with them, which minimizes our risk of supply and making sure that we get the quality that we want across our value chain. Sustainability is seen as a mandatory ingredient to business

rather than an optional add-on at Business 2. Similarly, Business 3 has engrained this focus of sustainability in their business as well, through which the alignment of economic, social, and environmental foci is reached. As the representative of Business 3 has put it: the fundamental, we

try to make a profit while doing so, so fundamentally that merges with the goal of doing good for the planet.

Consulting Firm 1 has reported complementary phenomena. The alignment of economic, social, and environmental foci is enabled through added value that sustainability is offering. Through cost reductions for operations as well as the fact that customer demands are growing in

this fields, the alignment of all foci is achieved. Furthermore, future legislation is expected to raise

sustainability standards, and a fine will be imposed for non-adherence, delivering another financial

driver why to invest in sustainability. Consulting Firm 2, on the other hand, introduces a clear

separation of the two foci per business model, where the traditional business model funds sustainable operations through donation of its earnings: He has funds he sells to banks and private

persons. But in the end, they donate half of what they earn to a foundation that helps people to start over with their own little company. The focal firm here has strong values for social

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26 Governmental Consulting Firm 1, both acknowledge the integration of foci through treating both in a competitive way, and with a long-term strategic perspective.

In summary, the majority of cases under study revealed to have integrated the three competing foci, either by cost reductions through operational improvement, or by integration of sustainable standards in both the traditional and sustainable business model. Consulting Firm 2 outlined a different approach, where the traditional business model funded the sustainable business model, thereby managing the competing demands by separation.

4.1.2 Comparability of performance metrics

In order to ensure the comparability of operations across the corporation, several possibilities have been reported. Business 2, Consulting Firm 1, Consulting Firm 2, Consulting Firm 3, and Governmental Consulting Firm 1 opted for the integration of both sustainable and traditional metrics across all operations. As Business 2 states it: And how we evaluate the program,

has the same KPIs as all the others as well, so it’s about return on investment, it’s about business growth, and brand, market share growth, penetration, so these are standard KPIs […].

Governmental Consulting Firm 1 has introduced a triple-bottom-line-canvas to ensure comparability of operations within corporations: This business model is neutral, it’s based on three

layers, where the first one is the economic layer, which you can also call the regular business model in a way, but then you have the society and you have the environment as two more layers that you have to consider. Business 3 managed future expectations for the sustainable business

model, and implemented a strategic mandate in order to counterbalance the bias for a decision based on return on investment: I think one thing that is pretty much clear for everyone involved is

that it is much harder to make the same level of returns for the projects that provide renewable energy compared to the ones that are coal-fired or gas-fired. So, in that sense, we needed to have a strategic mandate, for people to move them alongside conventional power products.

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27 way, where all metrics are being translated into an overarching KPI, for instance: Then you are

actually translating CO2 into Euros, and then you have one generic language that you speak.

Consulting Firm 2, on the contrary, reported a clear separation of metrics per business model, so that the traditional business model is still operated on the traditional, financial metrics whilst the sustainable business model only uses KPIs that are congruent with its goals and purpose. Hence, a comparison between each other willingly is not made.

In summary, there are three possibilities to ensure comparability of performance metrics transverse the corporation. Firstly, an integration of traditional, ergo financial, and sustainable KPIs across all operations. Secondly, a translation of metrics onto a higher, common metric. And lastly, a clear separation of metrics per business model.

4.1.3 Cannibalization of profit margins

Regarding the cannibalization of profit margins, a large majority of cases have confirmed that there is a long-term acceptance if not a strategic directive for a cannibalization of the traditional business model by the sustainable business model. Business 1 and Business 3, both operating in the energy sector, have accepted that there is a gradually increasing cannibalization throughout the process. As Business 3 stated it: So, you want to do it as fast as you can but still

trying to have a gradual transition in terms of moving away from these traditional cashcows to a new business model that can sustain the company. In a similar vein, Consulting Firm 1, Consulting

Firm 2, Consulting Firm 3, and Government Consulting Firm 1 also outlined that there is an accepted cannibalization of profit margin from the traditional by the sustainable business model.

Business 2 addresses the cannibalization issue based on a global-local strategic consideration, with sustainability not being the major consideration driver: So, this is a regular

business challenge, which projects or initiatives do you prioritize, how do they drive brand growth, and how do they build the brand over time. So, that’s a challenge that’s irrespective of any sustainability considerations. Both Consulting Firm 1 and Government Consulting Firm 1 have

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to stay within, they are probably going to be tightened in, so you should really take this into account when you are searching and experimenting with new business models, that should be sustainable in the long-run.

As shown above, there are two ways to address the possible cannibalization of profit margins. Firstly, there is the option to accept a cannibalization of the traditional business model by the sustainable business model. Secondly, profit margins are entirely based on global-local strategic decisions, and sustainability does not fall into play in those decision.

4.2 How do firms address the paradox of organizational culture and mindset?

4.2.1 Organizational culture and mindset

In order to address cultural difficulties caused by the coevolution of traditional and sustainable business models, Business 2, Business 3, Consulting Firm 1, Consulting Firm 2, Consulting Firm 3, and Government Consulting Firm 1 have outlined strong leadership as a key factor to harmonize culture throughout the coevolutionary process.

Business 1 deploys a participation-based corporate strategy with inclusive company purpose, that is continuously communicated internally to overcome cultural difficulties. Business 2, Consulting Firm 1, and Consulting Firm 2 advocate for strong, value-based corporate vision and philosophy that unite the workforce and resonate with the staff’s own values. As Business 2 states it: We are […] now at that stage where sustainability is not negotiable anymore, so whoever,

whoever want to join the company needs to be a believer, so we are at that stage. This ties in with

the practice of having champions within the company that are advocating and defending the cultural change caused by the co-evolution: And they need to be convinced that sustainable growth

programs deliver as well as, as you call them, traditional ones. And […] we are still on a journey of creating more and more believers. This practice is also acknowledged by Consulting Firm 1

and Consulting Firm 2.

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29 harmonize cultural development in light of the coevolution: […] along the way, the market was

showing that indeed that was what everybody else was also moving towards.

In short, factors addressing the culturally paradox situation the co-evolution has triggered are participation-based corporate strategies, and strong, value-based visions and philosophies, enacted by top-leadership and champions for sustainability. Moreover, market development facilitated acceptance.

4.2.2 Behavioral rules, norms, and regulations

In order to harmonize cultural issues during the coevolution, Business 1 has introduced a stage gate process, which involves relevant stakeholders at each step of the product or service design process. Therefore, engagement of all relevant stakeholders whilst moving forward ensures joint agreement, which counterbalances internal cultural issues. Furthermore, an in-house program of Business 1 establishes a common methodology which stresses the importance of optimizing existing processes and operations, thereby setting a common mindset across the workforce. Lastly, the company deliberately established two different strategic objectives per business model and positioned itself accordingly: So that’s sort of a positioning that you take as a company, to really

make a choice also deliberately, not to be the frontrunner there. So, for instance, in the commodity business, we said we want to be the number one, we want to be the biggest player in the Netherlands, and within […] the energy transformation unit, we want to be a leader and we want to be a top three player in the market […]. This helps to manage expectations for both internal and

external stakeholders.

Business 2 introduced a code of principles that employees sign every half-year, which clearly states the values of sustainability, respect, authenticity, and diversity, and emphasizes their pivotal standing for Business 2: Well, our business code of principles clearly states these values

of sustainability, respect, authenticity, diversity, that’s all in there, so they are vital. Secondly, a

strong mechanism is the firm’s innovation and corporate and brand development process, which puts emphasis on the fact that every brand has its own purpose and commitment to shape strategy accordingly: […] then another process is also our innovation process, and our brand development

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30

a strong influence on your innovation processes and the choices that you make, the strategic choices. This increased, continuous communication of values and purpose also resonates with

Consulting Firm 1.

Consulting Firm 3 and Government Consulting Firm 1 are putting emphasis on HR involvement and leadership, whereas Business 3 had not introduced any such mechanisms but has let the culture grow organically with the co-evolution, despite acknowledging this is still an ongoing endeavor: And that is something that is cultural change that was recognized along the

way, which was then slowly embraced but still, you know, still not fully completed.

To summarize, mechanisms used are HR involvement, leadership, an increased communication of values, and organic cultural growth.

4.3 How do firms address the paradox of training and staffing?

In order to respond to the paradoxical situation arising in the workforce during the coevolution of business models, the majority of cases under study confirmed a value-based hiring process to find the best match. As Business 2 states it: I really strongly remember that in the

assessment center already a big focus was on my values and beliefs, and I think a value driven business is also the foundation for our sustainability thrusts. Business 3 similarly states that

recruitment efforts would shift onto specialized talent for the new, sustainable business model. Consulting Firm 1, Consulting Firm 2, and Government Consulting Firm 1 also confirm these practices, as Consulting Firm 1 stresses the importance of hiring new staff with a sustainability-infused perspective or a dual background, whilst Consulting Firm 2 highlights the importance of screening for candidates for shared values. Government Consulting Firm 1 confirms a split into to separate units that work in parallel, hence, a split according to business models.

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31 program, where employees are encouraged to pursue their own purpose within Business 2, and annually, employees are being recognized and honored for their drive of business with purpose, which ultimately motivates employees and appreciates their drive. Business 1 has introduced two tools to train employees, one focusing on educating employees in everyday improvements, such as lean management or cooperation with the IT department. The second tool is a scaled-agile-framework, which measures operations based on impact and effort, and chooses projects on a weighted score of those two variables. This way, employees understand which project of which business model currently receives priority with the IT department and introduces transparency. Consulting Firm 2 has set up training courses to improve collaborative management, whilst Government Consulting Firm 1 also established an in-house training academy to facilitate skill development.

Next to these training opportunities, several cases outline the utilization of online training platforms to enable continuous learning. Business 2 has a dedicated online platform with online courses which are increasingly replacing face-to-face training sessions. These training sessions are purpose-driven online classes to work on a functional level, on a category level, and on an overarching corporate level: […] we are driving purpose-led learning on a functional level, and

by functional I mean then sales, R&D, marketing, but then also on a category level, so we have programs running, just last week for example we had an innovation workshop specifically for our food’s category, was the goal to develop new business models to reduce plastic waste, so very focused. Business 3 similarly offers an online platform where employees can educate themselves

on relevant matters, with courses being available group-wide: […] quite a number of online

courses are being sent around groupwide, so 260.000 people, where employees are invited to do an online interactive course that will basically introduce them into concepts like climate change and sustainability. Government Consulting Firm 1 established a comparable offer, with courses

even being available for the wider network around the firm: And the open platform is accessible

for clients, and also for all the enterprises working with the same clients.

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32 of coevolution. Accordingly, Consulting Firm 2 highlights: […] I really strongly believe in

building things with collective intelligence and collaborative management.

In short, hiring practices have become strongly value oriented. Training centers and online platforms have been introduced, and communication, leadership, and collaborative management has been facilitated.

4.4 How do firms address the paradox of resource allocation?

When considering how firms address the paradox of resource allocation here, resources are increasingly being re-allocated from traditional to sustainable business models. Business 1, Business 3, Consulting Firm 1, Consulting Firm 2, Consulting Firm 3, and Government Consulting Firm 1 have highlighted this during their respective interviews. Business 1 highlights that there are dedicated resources per business model, however, there is a shift in allocation towards the sustainable business model, both in terms of human and financial resources: But definitely the FTE

numbers in the commodity business is decreasing, while the FTE numbers in the […] business is growing, that’s for sure […] so, there you see more investment done in the energy saving solution segment, […] and I mentioned before, the more lean approach for commodity is resulting in less investment in the commodity business. Business 3 has highlighted a gradual redeployment of

resource from the traditional to the sustainable business model during the co-evolution as well: So,

it needed to be in a controlled manner, we needed to shift resources from the old model to the new one.

Consulting Firm 2, however, reported also that there is the phenomenon where units are

apart and there is a clear border, and no resource flow from one to the other. Business 2, in turn,

outlined that the resource allocation has in no matter any consideration for sustainability but is purely strategically based on business growth decisions and performance. This is based on an agile-performance review, where the priorly annual reviews are being moved to quarterly reviews in order to be more agile in the allocation of resources: In the past, we had every year, on a yearly

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33 In summary, resources are in most cases re-allocated from traditional towards sustainable business models. Alternatively, resources are being allocated per business model under a strategic narrative that does not imply migration of resources.

4.5 How do firms address the paradoxical situations arising in the stakeholder environment?

4.5.1 External stakeholders

On a general level, virtually all cases outlined a shift onto increased collaboration, communication, and interaction with stakeholders. Consulting Firm 1 outlines the increased importance stakeholders place on transparency and involvement: Stakeholders expect you to listen

to them more, at least show that you have tried to listen to them, stakeholders expect more transparency from you […]. All different kind of stakeholder groups expect you to be more transparent on what you are doing. Furthermore, an increase in communication is observable in

order to maintain close relationships and credibility with stakeholders, as outlined by Governmental Consulting Firm 3: So we are in a kind of very tight dialogue with them when it

comes to further development to that way of thinking and when it comes to environmental or the ecological side effects, so to say. Consulting Firm 2 and Consulting Firm 3 not only highlight the

increase in interaction, but also the growing number of stakeholders that need to be involved.

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34 parents on hygiene and the functionality of their products: […] and by having this national

partnership with the ministry of education we run national educational programs in more than a thousand primary schools in South Africa where it is then about learning the children how to wash their hands and making their toilets cleaner, and then also including the parents of the children.

Business 3 also highlights an increase in communication with their stakeholders during the process.

In summary, the co-evolution led to an increase in collaboration, communication, and interaction with external stakeholders as well as in the number of involved stakeholders. It caused a rise in inter- and intra-industry collaborations, and partnerships with governmental entities and NGOs.

4.5.2 Resistance throughout the value chain

With respect to resistance throughout the value chain, mixed reactions are observable. While Business 1 reported that there were no frictions during the coevolution due to the distinctness of the traditional from the sustainable business model, most cases highlighted tensions in their value chains. Business 2, on the other hand, has faced cynics and critics throughout the value chain that resisted. However, strong leadership and demonstration helped to convince them and get them on board. An example for this is the introduction of sustainable farming practices in Austria, which were even stricter and superior to organic farming practices. These sustainable farming practices had less impact on the environment and increased biodiversity. Moreover, they also provided a unique selling point for the company’s products. And after these practices were successfully implemented in Austria, other markets followed suit: So even at that time, we already

had agriculture experts who worked with our farmers to reduce the impact on the environment, increase biodiversity. And why? Because in that way we then could also tell more consumer relevant sustainable stories about our product and our ingredients. So, Austria was there really a leading force and influenced then this, the development of the sustainable agricultural practices that XXXXXXX launched 10 years ago, or 10-15 years ago, something like that. So, you always need…it’s about leadership run by real passionate believers who can then start convincing others.

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35 become common standard across the corporation. Hence, for Business 2, driving change throughout the value chain by strong leadership and demonstration of best practices is a way to address frictions caused by the co-evolution. Business 3, similarly, has experienced resistance, especially in the financial industry. Commercial banks and lenders display a certain reluctance to commit to the change toward sustainable business models up to date. As a remedy to this situation, collaboration with financial partners who are willing to change, and a lead-by-example approach is chosen.

Consulting Firm 1 indicates the same finding, that inertia on the suppliers’ side may hamper the development process on the sustainable corner of the co-evolution. To combat this resistance, an effective supplier screening on behalf of the focal firm is necessary. Suppliers who are willing, and compatible to the focal firm’s sustainable business model, should be engaged with in co-creation of value, as it is not always within the supplier’s realm of possibilities to develop more sustainable alternatives to their current offer. Congruently, Consulting Firm 2 outlines the cruciality of the screening and selection of a suitable set of partners in order to lead by example and encourage other stakeholders as well: You try and work with the stakeholders who have the

same vision and the shared values, and make some success with them, and then the other stakeholders follow suit. Consulting Firm 3 reiterates the need for consequent leadership and

change management across the value chain to address resistance.

Governmental Consulting Firm 1 implicitly highlights that more collaboration is vital. The approach chosen here is to argue from a risk management perspective. In the light of a crisis in the Norwegian economy in 2014, a desire to diversify the field of operations away from oil and gas has sparked in Norway’s strongest industry sector. Driven by the idea to utilize as much existing knowledge and technology as possible, Norwegian oil and gas firms started to diversify into health- and green-tech solutions. Simultaneously, they started modelling their operations with the triple-bottom-line canvas to account for costs and benefits across all three pillars, economically, socially, and environmentally. As Government Consulting Firm 1 puts it: We have to have more like this

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36 To summarize, in order to address resistance from the value chain, supplier screening and value-matching is deployed. Moreover, effective risk management is being advocated for.

4.5.3 Internal stakeholders

To address competing interests in the internal stakeholder environment, all seven cases display similar results. Vital to effective management of internal competing interests is leadership and collaboration. Consulting Firm 1 highlights the importance of leadership from the top level and a clear strategy to align interests. Furthermore, an internal communication structure that enables easy and quick inter-departmental exchange of information possible and an internal collaboration of staff members with different backgrounds is vital. Lastly, Consulting Firm 1 highlights the need of mutual understanding, as only with understanding of opposing perspective, common ground can be reached and interests can be balanced: And if I understand your perspective

more and you understand my perspective more, then we can actually actively try to balance these different interests. Consulting Firm 3 and Government Consulting Firm 1 are both highlighting the

need for a clear corporate vision and strategy, and Consulting Firm 2 and Consulting Firm 3 stress the importance of internal stakeholder involvement and participation in the process.

Business 1 and Business 2 stress the role unified processes and transparency play when trying to balance competing internal stakeholder interests. For Business 1, this was achieved through a common framework. The reason for this was the competition for IT resources, where both the traditional business model and the sustainable business model were contesting but the traditional model, being the bread-and-butter-line, was mostly getting priority. In order to harmonize this, a common framework was introduced and both business models are now being processed at the same impact rate: And you see there that there is now this common framework

[…], what I mentioned before, where both the commodity requirements for IT and the […] IT requirements are being really evaluated next to each other, and with this methodology now you see that […] IT requests are being leveled at the same impact rate regarding getting IT resources, and this was not possible without this framework […]. The increased transparency that has been

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37 recognition programs, also have introduced standardized processes to align interests. Top-down leadership is necessary to enforce change across the workforce, but the workforce also needs to start to believe into the concept of sustainability, which is achieved by the two programs mentioned.

Business 3, on the other hand, despite facing competing interests in the internal stakeholder environment, overcame these internal differences with patience and strategic consequence. While consistently continuing with the co-evolution, incumbent and resisting internal stakeholders diminished over time by natural turnover: One thing that gradually made it easier is that you have

a natural turnover of employees. And typically, the most senior ones are the ones resisting and they slowly are moving out of the picture. Hence, an organic approach is chosen.

To summarize, addressing the internal stakeholder environment involves leadership, as well as collaboration and a participative approach towards internal stakeholders. Furthermore, unified processes and transparency are vital. Alternatively, an organic approach can be chosen.

5. DISCUSSION

This section will examine and discuss the five different areas of paradox identified in the conceptual model. Findings are linked back to existing literature, and their impact on the conceptual model will be evaluated.

5.1 Competing Demands

This paragraph answers the sub-questions on how firms address the competing demands of economic, social, and environmental foci, how firms ensure the comparability of projects based on performance metrics, and how firms address the cannibalization of profit margins.

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38 can be found in the practices introduced by Consulting Firm 2, where the traditional business model donates a part of the generated profits to fund a social endeavor. Operational improvements, and hence Theater 2, to integrate social and environmental aspects can be found in Business 1, and Business 3, where next to a new, sustainable business model, social and environmental improvements were made through more efficient traditional operations in order to reduce costs while reducing impact (Rangan, Chase, and Karim, 2015). Similar support is found through Consulting Firm 1, Consulting Firm 3 and Government Consulting Firm 1, who in congruence with operational improvements highlighted in Theater 2 (Rangan, Chase, & Karim, 2015), report several business cases for sustainability as introduced by Schaltegger et al. (2012) and Hart & Milstein (2003) that have been found to serve as a medium to manage the competing foci during the co-evolution, such as cost reduction, customer satisfaction, (supply) risk reduction, as well as reputation and brand value. Business 2 displayed a transformation of business models by engraining sustainability as a mandatory part in every business model, thereby displaying Theater 3.

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39 triple-bottom-line-canvas, other options to integrate these three different metric structures within the corporate reporting structure may well exist, has been found in this research.

Schaltegger et al. (2012), when considering the issue of profit margin cannibalization, established three different types: (a) defensive, where products or product communication are adapted to reduce the risk of profit margin loss, (b) accommodative, where customer segments focused on sustainability are widely recognized and served with specific products, besides existing, traditional business models, and (c) proactive, where a competitive advantage is being strategically established with a sustainable business model to become the major pillar of a company’s portfolio. Hence, there is an increased acceptance of profit margin cannibalization when one moves from (a) to (c). Evidence was found for (b) the accommodative type, as most cases have established a sustainable business model while still resting on the traditional, economically focused business model, and (c) the proactive type, as Business 2 has transformed their business models to entail sustainability components throughout the corporation. However, it has to be noted that there is an acceptance of profit margin cannibalization of the traditional business model by the sustainable business model by all cases interviewed, therefore resembling a gradual shift in focus from the economic business model to the sustainable business model in the corporations’ portfolios.

Lastly, several cases named future legislation as a reason for them to believe that the share of profit margin may shift further onto sustainable business models. According to Lieder & Rashid (2016), the legislative part is indeed a driver for more sustainable business models, and legislation at least is not seen as a hampering factor for the future.

5.2 Organizational Mindset & Culture

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40 and Business 1 highlights a participative, inclusive corporate strategy with inclusive company purpose to motivate cultural harmonization. These value-related and inclusive corporate vision and strategy is found in the literature by both Stubbs & Cocklin (2008) and Lleo, Viles, Jurburg, & Lomas (2017).

Business 3 has highlighted that the market development helped to show the necessity of the move in the right direction, thereby making a strong case for cultural adjustment. Hockerts and Wüstenhagen (2010) encounter a similar result in their study on incumbents that pick up a greener operation and mindset after niche players reach a certain threshold in market share. Hence, Business 3 opted for an organic approach of cultural adjustment and harmonization based on the argument of best practices in the market.

In order to facilitate cultural harmonization, increased communication of values and purpose has been introduced, as well as different programs to standardize processes and boost growth based on common value sets. Zerfass & Viertmann (2016) describe a similar approach in their value-based communication paradigm, where corporate value communication to internal stakeholders is key for strategic, and hence, cultural alignment.

5.3 Training and Staffing

In terms of accommodating the workforce into the process of the coevolution, value-based hiring has been introduced by Business 2, Business 3, Consulting Firm 1, Consulting Firm 2, and Government Consulting Firm 1. This matches with the slightly confusing term in this context, ‘knowledge-based recruiting’, which “involves a strong and explicit focus on choosing candidates with relevant knowledge, learning and networking capabilities” (Kianto et al., 2017: 12). In the context of the coevolution of business models, the ability to properly learn and network hinges on the understanding of the common corporate values.

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41 training and development centers, either physically, as an online platform, or both. Business 2 additionally set-up a purpose-led self-development program. Noteworthy is also that three cases, namely Business 2, Business 3, and Government Consulting Firm 1 have introduced an online platform that reaches throughout the entire business group, or client network, respectively. Consulting Firm 2 outlined a training program to facilitate participative management practices (Lleo et al., 2017). In a similar fashion, Business 2, Consulting Firm 1, and Government Consulting Firm 1 also highlighted to have training facilities designed to increase collaborative management, communication, and leadership (Lleo et al., 2017; Stubbs & Cocklin, 2008).

5.4 Resource Allocation

The allocation of resource in the light of the coevolution of business models has shown interesting results. Business 1, Business 3, Consulting Firm 1, Consulting Firm 2, Consulting Firm 3, and Government Consulting Firm 1 have reported a gradual shift of resources from the traditional to the sustainable business model. This is in line with existing literature, as both financial and human resources need to be shifted towards the new business model at the right time, which is a balancing act (Björkdahl & Holmén, 2013; Chesbrough, 2010). Business 2 reported that resource allocation was based on their corporate strategy, and was dependent on an agile performance-review, so as to allocate resources fast and efficient across the corporation. This trend has also been gauged by Cappelli & Tavis (2016), who state the importance of agility to remain competitive and innovative. Lastly, Consulting Firm 2 reported that there was no resource shift between traditional and sustainable business model, but both had been allocated a certain amount of resources and they were running independently of each other, a notion that is supported by Björkdahl & Holmén (2013).

5.5 Stakeholder Environment

Taking a Paradox Perspective on the Coevolution Between Traditional and Sustainable Business Models