‘Business model’ vs ‘economic model’

Over the last few years a term has been on a seemingly inevitable rise: sustainable business model. A conversation I had yesterday reinforced one of the dividing lines I’ve seen, especially in sustainability circles, between the organisation-level and system-level.

Sustainable Business Model. It’s new! It’s exciting! It’s obviously better than, you know, incremental change. But what exactly is it?

Even without the tricky first word, business model means different things to different people.

On one side you have the term applied at the level of an individual company. Does X have a product or a service business model? This is where most business writers and academics are.

Osterwalder says a business model “describes the rationale of how the organisation crease, delivers and captures value”. In the same vein, Joan Magretta of Harvard Business School says that:

business models are at heart , stories–stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?

This is the sense that WRAP have with their Innovate Business Model Map.

But others have a broader motion in mind. They mean something like ‘an economic system where companies are expected to maximise short-term rerun regardless of consequences’ – in short, the Anglo-Saxon version of capitalism. So, when they say ‘companies need a new business model’ they mean something like ‘companies need to pursue a social purpose’ and/or ‘companies need to purist long-term value creation, and so have a stake in making a sustainable future’ and/or ‘organisations need to be accountable to their stakeholders’ and/or ‘enterprises need to be cooperative’.

As it happens it’s not just sustainability folk which have this broader notion. Noted economist and FT commentator John Kay has long critiqued the American Business Model, in interviews and his book, The Truth About Markets.

My view is that these two perspectives are talking about different things. The first is about companies, the second is about the economic system that a company is within.

If you try to apply these different meanings at the same level – the organisation – then you can accidentally force yourself to choose between, say, trying shift from products to services or registering as a public-benefit B-Corporation.  But, in my view, this conflates the underlying economic logic with legal form. A for-benefit company could sell products or services. A product-based business model have positive sustainability outcome, even if incorporated as a for-profit company.

That’s why I prefer to refer to ‘business model’ for the organisation-level and ‘economic model’ for the system-level.

Of course, we need change at both levels to change. We need an economic system that promotes long-term value creation, and therefore supports companies innovating their business models so they can make succeed through sustainability. I think – think – we’ll be more successful if we use different terms to mean different things, rather than the same term to mean different things.

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One thought on “‘Business model’ vs ‘economic model’

  1. catalystsb

    My opinion is that companies, who are not innovators or early adopters, need to achieve long-term value creation before they can fully focus on pursuing a social purpose. This way the long-term value creation business model would give board room credibility to sustainability as a whole. I’m with Hunter Lovins, who’s approach is that “lowering resource consumption is the most efficient way to maximise profits”. Meaning that financial benefit should be the primary motive when reducing resource consumption and that the ensuing reduction in environmental impact can be considered as a secondary benefit. Thus when evaluating options to reduce current operational expenditure, if we consider those which produce the least environmental impact we often find low cost solutions that would not be uncovered by traditional evaluation methods which consider costs only. So we are using sustainable viewpoints to unlock creative solutions to everyday problems by approaching them from an alternative perspective. Take B&Q’s 50% CO2 reduction from transportation by 2023 as an example. Carbon reduction is being used to throw business as usual out of the window which is resulting in impressive operational cost savings and reduced exposure to long-term environmental risk.

    Reply

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