The following paper was presented at IBA, Bangalore in 2010.
Abstract
The signs of an acceptance rather than denial of the environmental issue by the global community exemplified by global initiatives such as the various protocols and other initiatives lead us to think about the responses from the business community. While the market economy’s trust in the invisible hand has so far not rescued the environment, legislations by various governments are by far in the nature of fixing limits on the emissions. The latter tends to view the environmental issue as a problem rather than an opportunity.
Human awareness as it is, requires most importantly to recognise the scarcity shift, that is the shift from abundant resources and lesser populations at the time of industrial revolution to exploding populations and scarce resources more recently.
This paper traces the antecedents of the environmental issue starting with an analysis of the various models of living from the hunter gatherer to the modern fossil fuel. It postulates that humanity is at the juncture of a new sustainability crisis just as the one prompted the move away from the hunter gatherer to the agricultural.
Since both the availability and the non availability of the fossil fuels are sure to affect the world community, the former adversely on the environment and the latter adversely on the economy in its present form, makes switchover to a different business model and an economic model not a matter of choice but a necessity.
The paper traces the assumptions since the industrial revolution and recognizes the new realities that necessitate newer assumptions. New business models emerge around the new assumptions. Essentially all of these leads to rethinking business models which are in the nature of opportunities for business not only in terms of environmental protection but also in terms of profitability.
Keywords: business model, changing assumptions, changing realities, new models, communitarian living, environmental opportunity.
Introduction
Keywords: business model, changing assumptions, changing realities, new models, communitarian living, environmental opportunity.
Introduction
A discussion on business models in the context of the environmental challenge would require a tracing of the prevalent assumptions and the changes to those assumptions. The business models so far are premised on a paradigm based on assumptions of industry prevailing from the beginning of the industrial revolution. For ease of reference these may be called paradigm 1 assumptions and the imperative future one, paradigm 2 assumptions.
Given the challenges posed by the environmental issue, mankind is at a crossroads in that a change is inevitable (WBCSD, 1992). To understand the need for a change it may be necessary to trace the models of economy that humankind has gone through.
The earliest of these models of economy are those that are called the hunter-gatherer model. From an environmental perspective this model was characterized by man being part of the ecological system with use of resources in the raw form and generation of minimal organic waste that could be absorbed by nature itself. This model of economy prevailed till about 10000 years ago and is prevalent in the present only in pockets of remote existence of some isolated tribes. The next model is the agricultural one in which the interference to the ecosystem by man appears, but is minimal as in the use of land for cultivation and animal husbandry. The waste generated is organic and is capable of being absorbed by nature itself.
The transition from the hunter-gatherer to the agricultural economy is necessitated by the increase in population and relative scarcity of resources. In other words there was an unsustainability of the existing model. The transition from the primitive society to the agricultural society parallels this change in the economy.
The third model of economy starting around the 1700s is characterized by an industrial way of living with an exponential rise in the use of resources and energy and consequent generation of waste which are far beyond the assimilative capacity of the ecosystem.
When environmental and / or organizational limits are reached economies are forced to adjust and develop in new directions. A larger question is whether this process will converge to an economic- environmental state that is acceptable from the point of view of both equity and efficiency and be environmentally sustainable as well. (Venkatachalam, 2007)
The paradigm 1 assumptions
The paradigm 1 is premised on the assumption that the availability of resources is unlimited or nearly so. Such situations of relative abundance have occurred rarely and briefly in history such as when new continents were opened up. But the earth being a closed system any model will necessarily have to be on the assumption of limited resources. A corollary of the assumption of unlimited resources is that of perpetual growth.
A second assumption on which the paradigm 1 was premised is that of the assimilative capacity of the earth. The waste generated in the early part of the industrial revolution was limited and localized that they were in general absorbed by nature itself or was away from interference to human life. Waste thus was treated as an externality that was outside the purview of economic activity.
A second assumption on which the paradigm 1 was premised is that of the assimilative capacity of the earth. The waste generated in the early part of the industrial revolution was limited and localized that they were in general absorbed by nature itself or was away from interference to human life. Waste thus was treated as an externality that was outside the purview of economic activity.
In the matter of waste, in paradigm 1 the rights to private property and gain, however, was not balanced with a duty on the public and local commons such as an open grassland or a scrap yard depleted in quality over a period of time. Such degradation of public goods as a result of private gains is the idea that is captured in the term, the ‘tragedy of the commons’ (Hardin, 1968).
Yet another one of the assumptions is the treatment of nature as separate from man and his activities. This gave sanctity to any amount of intrusions, invasions and subjugations made into the natural world. The assumptions in the previous models namely the hunter-gatherer and the agricultural treated man as part of nature.
The conception of the stakeholders of business was limited to the shareholders and may be the customers in whose name the economic activities were justified. The concerns of scarcity of goods gave rise to the preeminence of production and later on when the production reached certain levels the model demanded that the consumption be increased by want creation techniques such as advertising and credit (Galbraith, 1958) so that the economic machine could be kept moving.
Paradigm 1 also assumes that the products and services in general are more attuned to the individual than to the group. This is evidenced in the development of products that are personal rather than collective such as the walkman. There is a business sense in this that the more individualized the needs are the more number of products are required.
Paradigm 1 assumes an exponential growth of population in line with its assumption of unlimited or relatively unlimited resources.
Paradigm 1 assumes an exponential growth of population in line with its assumption of unlimited or relatively unlimited resources.
One major concomitant of paradigm 1 is the fossil fuel economy. The drivers of industrial society include the capacity for sourcing and harnessing energy and resources in unprecedented quantities. The industrial economy is founded on the discovery of organic mineral deposits of coal and oil and is named the fossil fuel economy. This discovery and widespread use of convenient fuel drove economy and environment in unprecedented channels.
For the first time the wastes of human activities exceeded the assimilative capacity of the natural ecosystem. The term waste here embraces inefficient use of resources and generation of non bio degradable and toxic wastes mostly derivatives of fossil origin and the pollution of global commons such as the atmosphere in addition to the biodegradable waste that still causes a problem due to the sheer magnitude of its generation beyond assimilation. In addition the fossil fuel economy has created a new class of commons called the global commons and the tragedy of the commons is also scaled up to the ‘tragedy of the global commons’. Global warming and ozone depletion are but manifestations of this new tragedy.
The outcome of this fact is a new situation of unsustainability. For one the fossil fuels are non renewable. There is a time when the available supplies peak and thereafter the demands on the resource increases or remains high whereas the supply starts diminishing. This concept is captured in the term ‘peak oil’ (Hubbert, 1956).
The outcome of this fact is a new situation of unsustainability. For one the fossil fuels are non renewable. There is a time when the available supplies peak and thereafter the demands on the resource increases or remains high whereas the supply starts diminishing. This concept is captured in the term ‘peak oil’ (Hubbert, 1956).
The fossil fuels are required to maintain the economy and any additional availability and use threatens the environment. Because we have built an economy on the fossil fuels and because it is highly polluting, there is a twin edged unsustainability. In other words non availability of fossil fuels is a threat to the economy and availability would be a threat to the environment. It is imperative to move from the fossil fuel economy to the next.
The ‘limits to growth’ system archetype postulates that a reinforcing process of accelerating growth or expansion will encounter a balancing process as the limit of that system is approached. (Senge, 1990)
For nearly six thousand years in known history, the population of the planet grew steadily and towards the end of the twentieth century, it started growing exponentially. A feature of the industrial model based on paradigm 1 is that the industrial model demands growing consumption and the population aspires consumption. For some time such aspirations were fulfilled in a minority of developed nations but nearly all the rest of the nations now aspire to the same or similar levels of consumption. (Meadows, Sanders ; 1992)
For nearly six thousand years in known history, the population of the planet grew steadily and towards the end of the twentieth century, it started growing exponentially. A feature of the industrial model based on paradigm 1 is that the industrial model demands growing consumption and the population aspires consumption. For some time such aspirations were fulfilled in a minority of developed nations but nearly all the rest of the nations now aspire to the same or similar levels of consumption. (Meadows, Sanders ; 1992)
A global population demanding consumption levels of the present developed nations simply aggravates the crisis. By the principles of logistical growth models which factor in the carrying capacity of the earth, population should either be reduced concertedly by human kind or risk intervention by nature to be reduced to be within the carrying capacity. A scenario of dwindling supplies in the face of increasing demands would result in a behavioural phenomena of ‘lifeboat ethics’ (Hardin, 1974) where priority is given to survival of one even at the cost of the life of the other. A consumption driven economy demanded by paradigm 1 in a resource dwindling scenario is simply not sustainable.
We have moved from a paradigm 1 reality to a paradigm 2 reality demanding paradigm 2 assumptions.
We have moved from a paradigm 1 reality to a paradigm 2 reality demanding paradigm 2 assumptions.
Paradigm 2 Assumptions
Starting the last quarter of the twentieth century, the paradigm 2 realities are becoming apparent. However our assumptions have not kept pace with the change. The new assumptions therefore will have to be thus arrived at so as to be the base for the next economy.
The new model would require an assumption of limited or dwindling resources. It should consider that the assimilative capacity of the environment is long overshot and the local commons have given way to global commons. (WWF, 2000)
The new paradigm recognizes that no perpetual growth is possible and rather demands that a sustainable development model based on the limitations of the ecology be aspired at. Pollution is no longer an externality because of its global nature.
The assumptions of sustainable development are premised on the metaphor of the three pillars: economy, environment and the society. This is however inadequate and demands that the economy be viewed as embedded in the larger environment and not be treated as separate. Further it also needs to be seen that a third level namely the society is embedded between the environment and the economy. Just as society is limited by the environment, the economy is limited both by the environment and the society. (Mc Gregor, 2003) The new assumptions should be based on the priority of the society over the economy and the priority of the environment over both society and the economy.
The new assumption closely parallels the historical evolution of nature first, society later and economy even later. The new assumption also is founded on Gaia theory which postulates that the living and the non living are integral and the earth as a whole is a living system (Lovelock, 2000).
The assumption of an economy based on greater consumption is to be redrafted both at the individual level and at the business levels. By over consuming we are overdrawing from the real capital that is the Natural capital. The new economy therefore should be based on an assumption of the desirability of quality of life for larger numbers over mere quantity of consumption.
The new assumption closely parallels the historical evolution of nature first, society later and economy even later. The new assumption also is founded on Gaia theory which postulates that the living and the non living are integral and the earth as a whole is a living system (Lovelock, 2000).
The assumption of an economy based on greater consumption is to be redrafted both at the individual level and at the business levels. By over consuming we are overdrawing from the real capital that is the Natural capital. The new economy therefore should be based on an assumption of the desirability of quality of life for larger numbers over mere quantity of consumption.
The new reality of global effects further demands that the stakeholders are not merely the shareholders and the customers, but the entire humanity. It emanates from the reality that the quality of life in one part of the globe is determined by the economic activities elsewhere. By this an economy polluting the entire globe is to be avoided as much as an economy that exploits the disadvantaged. The environmental issue is not an isolated one in as much as social issues are intertwined along with the economic.
The ‘nature as capital’ assumption (Lovins, 1999) is another of those paradigm 2 assumptions. In strict terms it is not a new one in that it was only overlooked in the first paradigm.
Paradigm 2 discards exponential growth in population in favour of the logistical growth wherein the carrying capacity of the environment is factored in. Put differently there cannot be exponential growth without nature retaliating in which case population is curtailed to follow a logistical path.
New business models
In order to arrive at a paradigm 2 business model it is necessary to discuss what a business model is. Simply put, it answers the question how the business is planning to make money. It tries to answer the questions about the intended market or niche, the ways to reach that market, the value proposition and the factors needed to pull the business in the long haul. In addition, the elements of the business have to fit together. The product or service will necessarily have to deliver value at an affordable price and the business has to create a surplus for a time long enough to recover the costs. It should also be unique enough to ward off easy imitation by competitors at least until it has recovered the costs. In general the value proposition should be attractive enough to keep the market sufficiently interested in the product or service. A good business model answers the question who is the customer and what the customer values. It also answers the underlying economic logic that explains how value is delivered at an appropriate cost. A business model's great strength as a planning tool is that it focuses attention on how all elements of the system fit into a working whole. (Magretta, 2002). As an emergent reality of the paradigm 1 model, environment as a concern compels businesses into a new model.
The ‘environment as externality’ assumption of paradigm 1 did not give a place for the environmental concerns in this business model. To some extent it was not necessary since the scale of activities was limited. But with paradigm 2 assumptions it becomes necessary to design a paradigm 2 business model. The new realities therefore would call for new business models.
In environmental terms it may be said that the paradigm 1 business model was linear. It was characterized by a process model in which inputs were processed to give an output with a certain lifespan and then ejected into the environment. The same applies to most of the bye products and waste as well. As long as the emissions were not intended as inputs for another process they were also bye products left to take care of themselves.
This model is however alien to nature. Nature does not intend anything as waste. Nature absorbs waste into its own fold to be inputs for other processes. Hence all the processes in nature such as that of water, carbon and nitrogen are cyclic. The best way to describe natural processes is the term ‘cyclic’.
It turns out that the industrial processes that mankind has designed are linear rather than cyclic and over and above and sometimes in conflict with the natural one. The natural model is cyclic and any business model that factors in nature should therefore follow nature. (Frosch and Gallopoulos, 1989). An instance of such cyclic model would be to insist on companies to design systems so as to recall the products at the end of their life so as to be properly disposed, reused or recycled. The concept of industrial ecology that postulates community of industries where the output of one becomes the inputs for the other is an emergent model.
As mentioned there is an imperative that follows from the fossil fuel economy in that availability and non availability are both disastrous, the former one from the environmental point of view and the latter from the economic point of view. When the problem is the same the prescription is an alternative to fossil fuels.
As mentioned there is an imperative that follows from the fossil fuel economy in that availability and non availability are both disastrous, the former one from the environmental point of view and the latter from the economic point of view. When the problem is the same the prescription is an alternative to fossil fuels.
The population growth and the consumption driven economy also calls attention from the sustainability issue. It is unsustainable to continue the present rate of consumption without either destabilizing the environment or the society. If consumption is to be increased for the less developed nations as well then it is environmentally unsustainable. If on the other hand, the present consumption levels of the developed nations are to be maintained, then the question of global inequity would destabilize an increasingly globalised society.
It therefore follows that in the interim businesses would need to follow a reduced use of fossil fuels and use less polluting fuels such as CNG or LPG and in the long run to replace fossil fuels entirely. Between these two alternatives there is space for a number of business models for adoption.
The increase in pressure on profitability can be addressed in broadly two ways. Where the increase in profitability is attained by dematerialization or reduced energy usage it may have some positive impacts on ecological sustainability, where it is achieved by reduced employment there is likely to be social unsustainability (Mc Gregor, 2003). In either case the fact of limits to the resources of the earth places severe restrictions on the living styles of the future. In simple terms there is no alternative to frugality and austerity as a way of life. Businesses should therefore look at maintaining the profitability by defining their products and services in radically new ways. Given our present paradigm of consumption, it might sound impossible to reconcile profitability with reduced consumption.
There can therefore be three levels at which new business models can emerge. The first level of business model modification would be to create a compelling differentiation on ecological grounds. Environmental friendliness can be the new differentiator not only from an environmental point but also from the strategic point of view. Environmental differentiation by businesses would go a long way in conveying the message as well. Businesses and products exclusively in the environmental domain such as renewable also fall into this category. These are in the nature of new business opportunities in the wake of the environmental awareness.
The increase in pressure on profitability can be addressed in broadly two ways. Where the increase in profitability is attained by dematerialization or reduced energy usage it may have some positive impacts on ecological sustainability, where it is achieved by reduced employment there is likely to be social unsustainability (Mc Gregor, 2003). In either case the fact of limits to the resources of the earth places severe restrictions on the living styles of the future. In simple terms there is no alternative to frugality and austerity as a way of life. Businesses should therefore look at maintaining the profitability by defining their products and services in radically new ways. Given our present paradigm of consumption, it might sound impossible to reconcile profitability with reduced consumption.
There can therefore be three levels at which new business models can emerge. The first level of business model modification would be to create a compelling differentiation on ecological grounds. Environmental friendliness can be the new differentiator not only from an environmental point but also from the strategic point of view. Environmental differentiation by businesses would go a long way in conveying the message as well. Businesses and products exclusively in the environmental domain such as renewable also fall into this category. These are in the nature of new business opportunities in the wake of the environmental awareness.
The second level would be to integrate environmental performance at the design stage itself. Buildings for instance could be made water and energy efficient by designing water storage facilities and the use of insulating materials. Building structures could be designed to double up in functionality to include environmental performance such as roofing which could act as solar panels and also insulating structures.
The third level would be to radically rethink the products and services in a way that could be environmentally friendly without compromising on profitability. Looking at carpeting service instead of carpets as products, lighting solutions instead of lighting equipment and painting service instead of paint as the product are some of the examples. Selling of carpets, lighting equipment and paint takes second priority leading to considerable material frugality without affecting business or profitability (Reinhardt, 1999).
The third level would be to radically rethink the products and services in a way that could be environmentally friendly without compromising on profitability. Looking at carpeting service instead of carpets as products, lighting solutions instead of lighting equipment and painting service instead of paint as the product are some of the examples. Selling of carpets, lighting equipment and paint takes second priority leading to considerable material frugality without affecting business or profitability (Reinhardt, 1999).
Historically man has moved from a collective way of life to an individualistic way of life. In fact individualism is a concomitant of scientific and industrial revolution, but with a severe environmental cost. It is found that environmentally communal living makes a valuable contribution. American research shows that communards use 36% less petrol and 82% less electricity per person compared to their non communal neighbors. Overall communards use 1/3 of the energy their non communard neighbors. Their per capita access to conveniences is almost equal to that of the average US household member even though their per capita consumption is only 25% of the national average. (Metcalf, 2001)
A collectivist lifestyle without compromising on the good aspects of individualism yields dividends economically, environmentally and socially the very same aspects that are under threat in the present crisis. A move away from individualized facilities and therefore infrastructure businesses can innovate on this model and devise new businesses around the new model.
Conclusion
The environmental issue therefore can be treated as an opportunity rather than a problem for businesses. The models of business based on assumptions at the dawn of the technology revolution needs to be modified for the new set of assumptions that emerge from the new realities. Given business’ orientation for adaptation, the environmental imperative cannot be ignored. In fact the interests emanating from the environmental issue are not antithetical to the interests of business either. Environmental issues generate new business opportunities and new business models as well, which in fact improves the profitability as in waste minimization which is both environmentally and economically desirable.
Also the new realities may necessitate new modes of lifestyles as well. Businesses can take the lead in directing mankind into more frugal and communitarian ways of organising around resources. Thus the environmental issue is actually an opportunity that needs to be taken advantage of.
References
Also the new realities may necessitate new modes of lifestyles as well. Businesses can take the lead in directing mankind into more frugal and communitarian ways of organising around resources. Thus the environmental issue is actually an opportunity that needs to be taken advantage of.
References
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