Business Models for Systemic Eco-innovations

Transcription

1 1 February 2012 Business Models for Systemic Eco-innovations Final Report Under the Framework Contract B5/ENTR/2008/006- FC-LOT5 Business Models for Systemic Eco-innovations

2 Business Models for Systemic Eco-innovations Final Report technopolis group, February 2012 Asel Doranova Michal Miedzinski Geert van der Veen Alasdair Reid Lorena Riviera Leon Matthias Ploeg Malin Carlberg Liina Joller ii Business Models for Systemic Eco-innovations

3 Business Models for Systemic Eco-innovations

4 Table of Contents Executive Summary 5 Introduction 8 1. Green Growth and the Role of Eco-innovation Challenges of the Transition to Green Growth Eco-innovation in Green Growth Radical and Systemic Eco-innovations The Business Case for Systemic Eco-innovation The Role of Business Models in Radical and Systemic Eco-innovations Understanding Business Models for Eco-innovation Defining Business Models Business Models and Eco-innovation: The Lessons from the Literature Towards the Conceptual Framework of Business Models for Eco-innovation Business Models and Sustainability The Definition and Key Components of Eco-innovation Business Models Understanding the Wider Impacts of Business Models Public Policy for Business Models of Eco-innovation Case Studies of Business Models for Eco-innovation The Methodological Approach to Analysing Case Studies Eco-innovation business models: a case study based analysis Comparative Analysis Main findings from case studies Key findings Policy messages 94 References 95 ii Business Models for Systemic Eco-innovations

5 Table of Figures Figure 1 Eco-innovations: Incremental and Systemic Innovations Figure 2 The Business Model Canvass...20 Figure 3 Trend in Publications covering Eco-innovation...22 Figure 4 Business Models for Eco-innovations covered by the Literature Review...23 Figure 5 Relevance of Impact Reduction Mechanisms per PSS type...27 Figure 6 The Extended Business Model Concept...36 Figure 7 Value Creation in the Perspective of the Value Chain and Wider Impacts...39 Figure 8 Value Creation in Multi-Actor Business Models Figure 9 Policy Measures for Eco-innovation...42 Figure 10 Policy Impact on Business Models for Eco-innovation...42 Figure 11 Classifying Business Models for Eco-innovation...45 Figure 12 Greener Products and Processes based Model...49 Figure 13 Waste Regeneration Model System...54 Figure 14 Functional Sales (Cleaning Service) Based Model System...58 Figure 15 Renewable Energy System...62 Figure 16 ICT Based Models System...66 Figure 17 ESCO Innovative Financing Model System...69 Figure 18 Business Model of Better Place...72 Figure 19 Sustainable Mobility: Transport-sharing Model System Figure 20 Kwinana Business Model (left) and Enabling Mechanisms (right)...78 Figure 21 Industrial Symbiosis...79 Figure 22 Business Model of DigiEcoCity...82 Figure 23 The Hammarby Model...83 Figure 24 Sustainable City/Neighbourhood System...84 Figure 25 Value Creation and First-order Value Chain Effects Figure 26 Business Model Innovation: Changes in the Components...89 Figure 27 Wider or Second Order Impacts of Business Models Figure 28 Importance of policy instruments for various types of eco-innovation...92 Business Models for Systemic Eco-innovations

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7 Executive Summary With a view to sustaining economic activities, jobs and competitiveness, while addressing environmental and natural resource scarcity challenges, countries are increasingly seeking innovative ways of promoting economic activities of their business sectors. The rapid and wider diffusion of eco-innovations can have a significant leveraging effect on environmental, as well as on economic and social improvement. As incremental innovations alone cannot achieve a complete decoupling of economic growth from environmental impact, increasing the market potential for more radical and systemic eco-innovations is of particular importance for a long-term transition and transformation towards a greener economy. This study explores, via a literature review and case studies, the potential of radical and systemic eco-innovations and aims to discover how successful models can be further extended and accelerated through the application and development of ecoinnovation policy. In order to encourage industry to take up the economic opportunities arising from developing and diffusing eco-innovative products and services, the study examines non-technological innovation aspects, particularly the role of business models for supporting successful commercialisation, in addition to its consideration of the development of environmental technologies. The study proposes a conceptual framework for analysing business models for ecoinnovation. The framework serves to analyse both the static/structural elements of a business model such as actors, linkages and value chain and the dynamic elements such as changes in value proposition and reconfiguration of value chain, production and collaboration activities, and impacts creation. The available cases provide insight into the business models used by eco-innovative companies and the importance of these business models in systemic eco-innovative changes. The conceptual framework was used to analyse cases of business models for eco-innovations collected from nine countries. The diverse eco-innovations discussed in the case studies are grouped as follows: Greener product/process based models Waste regeneration systems Alternative energy-based systems Efficiency optimisation by ICT Functional sales and management services Innovative financing schemes Sustainable mobility systems Industrial symbiosis Green cities The major findings are as follows: Eco-innovations offer companies increasing opportunities to capture economic value through finding new business opportunities, new markets and new revenue streams. Adopting more sustainable business models and eco-innovations provides a range of other benefits/values for companies that strengthen their competitiveness. These include increased saving of resources, cuts in associated cost and a reduction in waste management costs. Innovative business models can play an important role both in promoting ecoinnovations in the market. By creating new ways of delivering value to customer, Business Models for Systemic Eco-innovations 5

8 rethinking their customer base, establishing new alliances and reconfiguring value chains companies can instigate significant changes toward new and more sustainable practices. The analysed companies adapted to a larger or smaller extent their business models to be able to introduce eco-innovations. A majority adapted their operations; some companies revisited their value propositions and reconfigured their relationship with customers. In the service oriented models such as functional sales and car sharing there was a more fundamental shift from product to service provision. Economic benefits, such as cost savings, new revenue streams, additional profits, and a better quality or service or product (e.g. flexible access, efficiency) are dominant types of values for companies. Although environmental values have been rarely at the centre of business proposition, the expected environmental benefits, such as reducing the impact of waste or emission reduction, have been a relevant element supporting or inspiring new business models (e.g. waste regeneration, waste to energy, industrial symbiosis, mobility). In the case of green cities environmental improvement is in the centre of the models value proposition. The analysed models have a promising potential to generate indirect positive environmental benefits. These are associated with the resource and energy efficiency and with the use of new products or technologies with improved environmental performance helping to avoid air, soil, water contamination, and GHG emissions. A wider application of eco-innovation business models can lead to societal impacts such as job creation or improved quality of life. The incorporation of social drivers in the business models increases the likelihood of systemic change. Green cities and urban mobility projects place sustainable lifestyle and new mobility paradigms at the core of new solutions. Business models can only contribute to systemic innovation if they are widely diffused. Their diffusion and impact is, however, influenced by the framework conditions, which determine economic viability of any value proposition. However, new eco-innovation business models themselves may be one of the factors changing framework conditions and triggering emergence of new production and consumption patterns (e.g. trough raising awareness of various stakeholders, promoting new standards, and creating new markets). The empirical analysis has been complemented by an analysis of the role of four types of policy measures: (a) Market based instruments, including eco-tax, carbon tax, cap and trade schemes and removal of harmful subsidies; (b) Supply side measures, such as support for R&D, business development, testing and demonstration, provision of training, information and advisory services; (c) Demand side measures, including the provision of infrastructures, performance standards, labelling, certification, public procurement, consumer subsidies and pricing, support for technology transfer and standardisation of technical elements; and (d) Cross-cutting measures, such as support for networks, foresight, road-mapping and scenario development. The analysis highlights the potential relevance of such policy measure for the success of eco-innovation and leads to a number of findings: Public policy can have significant direct and indirect influence on eco-innovation business models, even if in most cases it does not target business models explicitly. All types of policy measures can be considered relevant in framing business models. Among the demand side instruments, performance standards, green labels and certificates appear to have higher importance in developing new eco-innovative products, materials and processes. Public procurement and consumer subsidies have a promising potential for ensuring economic viability and diffusion of ecoinnovative product and services. The provision of infrastructure and enabling 6 Business Models for Systemic Eco-innovations

9 technologies are important for business models such as sustainable mobility and ICT based services schemes. Supply side policy measures are relevant in promoting the eco-innovations, notably in terms of supporting R&D and demonstration activities. Support measures promoting various forms of networking and partnerships may be also relevant for the selection of key partners and indirectly influence business models. The regulatory and market-based instruments, notably environmental and carbon taxes and regulations on harmful substances showed to be relevant in most of the cases. Carbon trading scheme creates incentives for development of clean energy and waste regeneration systems An additional observation is the active leadership role of certain Government bodies in some eco-innovative initiatives, e.g. in building green cities, industrial symbiosis or sustainable mobility. Business Models for Systemic Eco-innovations 7

10 Introduction By 2050, the population of the planet will have increased by 30% compared with that of This growth will create billions of new consumers with needs from housing, food, clothes and transport to electrical appliances. However, the shrinking availability of natural resources, deteriorating environmental conditions and changing climate will limit the ability of the global population to pursue lifestyles and consumption patterns similar to those that exist in today s developed countries. We are already experiencing challenges to sustained prosperity and economic growth. The current economic crisis has further exposed the need for a reconsideration of the traditional economic models that are based on ever increasing consumption. In their attempts to revive industrial activities, job markets and competitiveness during the economic crisis, countries are increasingly seeking more innovative and sustainable ways of promoting economic activities in their business sectors, whilst tackling global environmental challenges such as climate change and the scarcity of natural resources. National and international policy-makers have been adopting strategies such as sustainable development, green growth, sustainable production and consumption on the one hand, and are actively promoting innovation and knowledge-based development on the other. Hence, there is an increasing recognition of the role of ecoinnovation. The OECD Green Growth Strategy (OECD, 2011a) indicates that green growth policies should encourage innovation, which can produce economic gains, by eliminating sources of inefficiency in the use of natural capital. This can also foster new economic opportunities through the emergence of new green markets and related activities. The rapid and wider diffusion of eco-innovation can have a significant leveraging effect on environmental, as well as on economic and social improvement, by enabling win-win synergies to be established both in OECD and non-oecd countries. As incremental innovations alone cannot achieve a complete decoupling of economic growth from environmental impact, increasing the market potential for more radical and systemic eco-innovations is of particular importance to a long-term transition and transformation towards a greener economy. This study explores the potential of radical and systemic eco-innovations and aims to discover how success can be further extended and accelerated through the application and development of innovation policy. In order to encourage industry to take up the economic opportunities that are derived from developing and diffusing eco-innovative products and services, the study examines non-technological innovation aspects, particularly the role of business models for supporting successful commercialisation, in addition to its consideration of the development of environmental technologies. Since such eco-innovation processes are relatively unknown to policy-makers and industry alike, a number of real-life cases have been collected and analysed. These cases provide a better understanding of the business model concept and its role in systemic eco-innovative changes. The findings should help governments to develop and implement policies that will enable and drive green transformation through the wider diffusion of eco-innovation practices. The first chapter outlines the main industrial challenges to the attainment of green growth and discusses the role of eco-innovation in fostering green transformation. It reviews different types of eco-innovations and discusses the relationship between those of a more radical and systemic nature and the enabling role of non-technological innovation such as new business models. Chapter 2 reviews the literature on ecoinnovations and focuses, in particular, on the role of business models. Chapter 3 8 Business Models for Systemic Eco-innovations

11 proposes a conceptual framework for analysing business models for eco-innovation and considers their impact and related public policies. Chapter 4 applies the conceptual framework to the analysis of specific cases, while the final chapter highlights a number of key findings. The study was prepared with the financial support of the European Commission s Directorate General for Environment in the framework of an agreement with the Organisation for Economic Co-operation and Development (OECD). Dr. Tomoo Machiba of the Green Growth and Eco-Innovation Structural Policy Division, Directorate for Science, Technology and Industry of the OECD and Mr. Aurelio Politano, of the European Commission s Environmental Technologies Action Plan (ETAP) team coordinated the study. Business Models for Systemic Eco-innovations 9

12 1. Green Growth and the Role of Eco-innovation 1.1 Challenges of the Transition to Green Growth Green growth (OECD 2011a, EC 2011) is increasingly at the core of national and international debates on the economic crisis and recovery and now the need for a broad transition and transformation towards more sustainable economic and social systems has also begun to be widely discussed. Initially, the argument was that the crisis provided a unique opportunity to improve energy and materials efficiency and to implement a structural reform of the existing brown industry (OECD, 2010). However, there is a growing concern about the sustainability of economic growth that underpins a demand for a greener model of growth (OECD, 2011a). Green growth is a long-term transition of economic and industrial structures as well as a method of capturing short-term opportunities, notably in terms of reforming those government policies that could be considered inefficient or harmful to the environment. The green growth agenda may differ in its assumptions, conceptualisation and assigned goals in the economically advanced countries as compared to the developing and emerging countries (Huberty et al., 2011; IIED, 2009; IGES, 2011). However, the common challenge of green growth is about achieving a decoupling of economic growth from environmental degradation (OECD, 2011b). Moreover, there are significant challenges in how the transition, a shift from the current resource-intensive economic system towards a future low-carbon, resource-efficient economy, is to be achieved, which have different implications for OECD and non-oecd countries. While in OECD countries this transition mainly entails a structural change towards a resource-efficient, knowledge-based economy, in many developing countries, green growth requires strategies that contribute significantly to the objectives for development and the reduction of poverty. Repeating the economic growth path of industrialised nations is not a sustainable option for developing countries and their emerging economies. The challenge is to improve living standards without imposing an excessive burden on environmental carrying capacity (OECD, 2011b). Given the accumulated knowledge and technologies, such economies should leapfrog to more sustainable economic structures. For example, the lessons of the current technological regimes suggest avoiding carbonbased energy systems, whilst sustainable agricultural achievements can help the poorest communities to escape from a vicious circle of poverty. The transition to a greener economy is both a challenging and a long process, as there are many structural, political, technological and cultural obstacles that need to be overcome. So far, there is rather limited evidence about how the two-fold objective of economic growth and decreased emissions and resource consumption can be achieved, and much larger, systemic changes seem to be required to transform the economy. 1.2 Eco-innovation in Green Growth It is widely acknowledged that innovation is a driver of economic and social progress on a national (macro) level, as well as a driver of business success and competitive advantage at the firm (micro) level. However, if countries want to move towards a more ecologically sound and prosperous society, it is important to promote the right kinds of innovation. Such innovation should open up new ways of addressing current and future environmental problems and of decreasing energy and resource consumption, while promoting sustained economic activities. This type of innovation is referred to as eco-innovation. 10 Business Models for Systemic Eco-innovations

13 The European Commission s Eco-innovation Action plan defines eco-innovation as any form of innovation resulting in or aiming at significant and demonstrable progress towards the goal of sustainable development, through reducing impacts on the environment, enhancing resilience to environmental pressures, or achieving a more efficient and responsible use of natural resources. (EC, 2011) Eco-innovation is also defined as the implementation of new, or significantly improved, products (goods and services), processes, marketing methods, organisational structures and institutional arrangements which, with or without intent, lead to environmental improvements compared to relevant alternatives. (OECD, 2010, based on the OECD/Eurostat Oslo Manual, OECD/Eurostat, 2005) The European Eco-Innovation Observatory (EIO) defined eco-innovation as the introduction of any new or significantly improved product (good or service), process, organisational change or marketing solution that reduces the use of resources and decreases the release of harmful substances across the whole life-cycle. (see In the context of the global challenges including the economic downturn, environmental degradation and the scarcity of resources, many governments view ecoinnovation as part of a new growth strategy. Eco-innovation is a way of reconciling economic and environmental priorities and opening up new sustainable pathways for industry. In the European Union (EU), eco-innovation is a key element of a green growth priority within the Europe 2020 strategy. The European Eco-Innovation Action plan (2011) sets out an agenda for green growth and the creation of green jobs. The plan s core concept is that eco-innovation will promote economic development and competitiveness and also help society to adjust to environmental and resource constraints. It supports the development and diffusion of promising, smart and ambitious operational technologies and will foster international cooperation. It increases the focus on business, especially on small and medium-sized enterprises (SMEs), and on leveraging private funding through new financial instruments (EC, 2011). Other governments are also promoting the eco-innovation concept, in one form or another, in their dual-goal strategies (OECD, 2010). In the United States policy agenda the terms clean technology or cleantech and environmental innovation are more common than eco-innovation (OECD, 2008a). The US Environmental Protection Agency approaches environmental innovation as a result-oriented, collaborative endeavour and places an emphasis both on innovation in the regulatory approaches and in technologies or techniques for environmental protection. The updated 2011 Strategy for American Innovation highlights, amongst other topics, the unleashing of a clean energy revolution. By promoting investments in smart grid, energy efficiency and renewable technologies like wind, solar or bio-fuels, the strategy aims to promote ingenuity and progress that can create jobs and economic growth and end the dependence on oil (The White House, 2011). Eco-innovation is at the heart of the 2007 Japanese Strategy for Sustainable Society in the 21st Century 1 and is explicitly referred to in a number of key policy documents (OECD, 2008b). The Ministry of Economy, Trade and Industry (METI) defines ecoinnovation as techno-social innovations to meet environmental challenges, resource constraints and diversification of values among the people with compatibility between economy and environment. Measures supporting innovation address not only industry and infrastructure, but also consumers, by encouraging sustainable 1 The strategy s full title is "Becoming a Leading Environmental Nation Strategy in the 21st Century: Japan's Strategy for a Sustainable Society". Business Models for Systemic Eco-innovations 11

14 consumption and life-style (OECD, 2008b). Japan s New Growth Strategy, introduced in 201o, includes green innovation as one of seven key areas to grow. It aims to promote green innovation and growth via the three main tasks of: 1) promoting the spread of renewable energy through feed-in tariffs and investment in smart grids; 2) encouraging green buildings and public transport; and 3) revitalising forestry. The strategy s targets are to create 50 trillion yen of new demand and 1.4 million new jobs through the development and diffusion of green technologies (Jones and Yoo, 2011). The Korean Green Growth strategy aims to create new engines of economic growth through green technologies, green industries and the building of structural foundations for a green economy. While the term eco-innovation is not used, the concept permeates 10 policy orientations, including: mitigation strategies for greenhouse gases; enhancement of energy independency via the use of clean energy technologies; the promotion of sustainable agriculture; the development of green technologies; greening existing industries; land, water and transportation; increasing the role of services and support measures like green product procurement; green taxation; and bringing the green revolution into daily life. Thanks to this strategy, Korea aims to be a role model for the international community. Given the increase in demand for resources from emerging economies, decoupling economic growth by fostering resource productivity is a key prerequisite for green growth and sustainable development. However, the present pace of resource efficiency improvements is too slow to respond to the need for decoupling and the incremental business-as-usual improvements alone are not likely to be able to address the existing challenges. While incremental optimisation through energy saving and ecoefficiency measures is playing an important role in diffusing greener practices more widely, it s the disruptive end of the eco-innovation spectrum that is the most promising in the long term (Future Think, 2008; Hellström, 2007). The current level of environmental and economic challenges requires major changes in how economies and industries function. Scrase et al. (2009) claim that there is a clear need for radical step jumps in the environmental and social performance of policy instruments, organisational practices, technological infrastructures and individual behaviours alike (similarly, VROM, 2003; Federal Government of Austria, 2002; Philips, 2007; Geels et al., 2008; DEFRA, 2004, 2006; WBCSD, 2008). More radical forms of eco-innovation may be the key to enabling such a sustainable transition. Clearly, incremental improvements are very important although they may also help to lock social practices into existing trajectories and thus make radical solutions, which require changes in the current technological or infrastructural regime, more difficult to be deployed (Hellström, 2007). Investing in radical solutions is therefore important and can maximise long-term gains and wider impacts. 1.3 Radical and Systemic Eco-innovations Over the years, the recognition of environmental problems and their complexity has grown considerably. The diffusion of the sustainable development concept since its introduction over twenty years ago, as well as the more recent green growth agenda, have contributed significantly to the understanding that simple cleaning of end-ofpipe pollution is not enough. The scarcity of natural resources, combined with the overall limits on the carrying capacity of our planet and the ever increasing consumption volumes and patterns, is another growing challenge that is now receiving more recognition and attention. Along with the recognition of such problems, the approaches and technologies to address them have also been evolving. Current R&D and technological achievements offer a large variety of eco-innovative solutions ranging from targeted pollution cleaning and prevention through to those that embrace ample improvements throughout the lifecycle of products to new technology applications that promote changes at a systemic level or on a wider geographical scale (OECD, 2010a). 12 Business Models for Systemic Eco-innovations

15 Solutions such as pollution control, cleaner production, eco-efficiency measures, ecodesign and green products are most often applied by industry. They are powerful tools for improvement in efficiency, as they can be introduced within existing production, process or business systems, without changing the underlying technological regime. 2 Such solutions are easier to manage as they often involve fewer actors and are often faster and less costly to implement because they involve only a product or a process and not a whole system of use. They are therefore relatively quick in generating results and have enabled substantial environmental improvements over recent decades and could help to lead to a relative decoupling of economic growth from environmental pressure (OECD 2011b). However, the impact of these solutions are often of a local and incremental nature and are insufficient to achieve an absolute decoupling. Furthermore, they may strengthen lock-in to the traditional patterns of production and consumption and run the risk of reducing the future potential for green growth and sustainable development. Therefore, more radical solutions that imply changes to the existing technological regime are essential in producing the type of results that enable absolute decoupling. To understand the basic mechanisms of different greening options from the innovation point of view, a distinction between three types of innovations can be made (Scarse et al, 2009): Incremental innovation, which aims at modifying and improving existing technologies or processes to raise the efficiency of resource and energy use, without fundamentally changing the underlying core technologies. Surveys of innovation in firms demonstrate that this is the dominant form of innovation and eco-innovation in industry; Disruptive innovation, which changes how things are done or specific technological functions are fulfilled, without necessarily changing the underlying technological regime itself. Examples include the move from manual to electric typewriters and to word processors, or the change from incandescent to fluorescent lighting; Radical innovation, which involves a shift in the technological regime of an economy and can lead to changes in enabling technologies. This type of innovation is often complex and is more likely to involve non-technological changes and mobilise diverse actors. Radical innovations include not only the development of radical, breakthrough technologies but also a reconfiguration of product-service systems, for example, by closing the loop from resource input to waste output or cradle to cradle 3 and the building of business models that re-shape the way consumers receive value on the one hand and reduce material use on the other. A sophisticated combination of these different types of innovation, together with new organisational and managerial arrangements, could induce far-reaching changes in the techno-societal system and enable a long-term green transformation by affecting several branches of the economy including consumers. One such example is the introduction of a new urban mass-transit system. This could involve a combination of changes to control systems, as facilitated by communications technologies, organisational practices, like moves from hierarchical to networked collaboration, infrastructure management, such as those enabled by computing technologies, environmental monitoring, pushed by advances in remote sensing, manipulation techniques, as in genomics, or materials production, such as those made possible by 2 Technological regime implies technological or sectoral environment in which the firm operates. Smith (2008) explains that this concept embraces the whole system of production organisations and methods, scientific and engineering knowledge organisation, infrastructures and social patterns of technology use. 3 Cradle-to-cradle design is a biomimetic approach to the design of systems. It models human industry on nature's processes in which materials are viewed as nutrients circulating in healthy, safe metabolisms. Business Models for Systemic Eco-innovations 13

16 modern industrial chemistry and nanotechnology. (Steward 2008 and Scarse et al, 2009) Such innovations are defined as systemic innovations and are also referred to as transformative innovations by Scarse et al, They are more likely to take place far beyond the boundaries of one company or organisation, as it often requires the transformation, replacement or establishment of complementary infrastructures. From the perspective of the transition to a greener economy and the decoupling of growth and environmental impacts, more attention is being paid to systemic innovation as it could generate wider and continuing impacts in the medium to longterm. (OECD, 2011b; Smith, 2008; Scrase et al. 2009) Systemic eco-innovation is increasingly considered to be a cornerstone for the green economy as it may help the society exit from the current hydrocarbon-based technology regimes. Although they may be incremental in relation to precursor technologies in the field, the cumulative effect of systemic innovations on the technological systems into which they are introduced can often be very radical. Either way, system level innovations share together with radical innovations originating within a particular sector, the property of being only poorly understood or represented by established groups of stakeholders in the sector concerned. In addition, such innovation involves substantive risky investments by its champions, conflicts between emergent and incumbent actors, and reconfiguring traditional sectoral and policy boundaries (Scarse et al, 2009). Radical and systemic innovations are highly complex as they often involve many actors and a range of technological and non-technological changes in organisational and institutional arrangements. One of the imperatives for these innovations is that both suppliers and consumers should embrace social and cultural changes and adopt new values and behaviour. Systemic innovations are commonly characterised using such attributes such as fundamentally new engineering and scientific principles, major price-performance improvements, creating a major disruption in the market by making traditional practices obsolete, and being based on new ways of creating values (OECD, 2011a). Figure 1 Eco-innovations: Incremental and Systemic Innovations Source: OECD Radical and systemic innovations do happen, but the direction of change they bring is difficult to predict and direct. This is a problem with eco-innovations, where the direction of change needs to be towards a decreased environmental burden, because society wants to steer innovations in that way. However people s awareness and willingness to contribute to solving environmental problems might be an important 14 Business Models for Systemic Eco-innovations

17 factor in promoting such solutions, but people often exhibit different, less green, behaviour as a consumer than they might display in other aspects of their civic lives. provides a conceptual distinction between incremental and radical and systemic eco-innovation. Although drawing boundaries between different levels of ecoinnovation activity is not necessarily easy, it can generally be considered that radical and systemic eco-innovations include those on the right-hand side of the figure. It should also be noted that incremental innovation is sometimes part of, or even a prerequisite, for more systemic changes. From the perspective of a transition to greener economies and the decoupling of growth and environmental impact, increasing attention is being paid to systemic innovation as these innovations can bring a wider and persistent impact of a long-term nature. (OECD, 2011; Smith, 2008; Scrase et al. 2009) Such eco-innovative solutions are increasingly becoming a cornerstone for future sustainable and green economies, as a way of exiting from current hydrocarbon regimes, addressing mounting problems of natural resource depletion and creating new economic opportunities. 1.4 The Business Case for Systemic Eco-innovation Over the past few decades, an increasing number of companies have started to explore business opportunities linked to eco-innovation. A new class of entrepreneurs tapping into green business opportunities is emerging and seeding the dynamism of creative destruction (Hawken et al 1999, Hargroves, 2005). In the wider business perspective, companies have shifted from perceiving environmental obligations as an expensive burden to seeing the economic and business opportunities of greening their industries and of producing clean goods and services. The greening agendas of businesses have been intensively populated by such concepts as the ecological footprint, eco-efficiency, greening the supply chain, industrial ecology and dematerialisation. The views of Porter and Van der Linde (1996) on how competitive advantage can be achieved through greater resource productivity, eco-design and cleaner products and services, are now widely accepted by businesses and sometimes advocated by governments. For example, Josef Ackermann, Chairman of the Management Board of Deutsche Bank, stated the challenge [towards green growth] is huge. So is the opportunity. This includes opportunity for new businesses, banks, new jobs, in creating energy and resource security and independence for countries. Many firms are increasingly being persuaded to integrate non-financial metrics into their decision-making processes, to re-visit the concepts of value and profitability that drive their business models and to reconsider the balance between the dual objectives of profitability and sustainability. Bryson and Lombardi (2009) explained that these are driven by the emerging markets for greener products and services, often caused by regulation, green taxes and other government instruments, as well as by changing consumer demand. However, the rise in importance of sustainability, social and environmental responsibility agendas is very evident within companies. These trends are expected to accelerate in the years to come along with the growing economic opportunities and business segment niches provided by the sustainability and green growth policies. In looking at how business opportunities will be developed in the long-term future, the World Business Council for Sustainable Development (WBCSD) designed the Vision 2050 jointly with member multinational companies (Figure 2). The expected economic transformations represent opportunities in a broad range of business segments, as they see the challenges of growth, urbanisation, resource scarcity and environmental change becoming key strategic drivers for business in the coming decades. Business Models for Systemic Eco-innovations 15

18 Figure 2 WBCSD 2050 Vision Source WBCSD, 2010, Vision 2050 report In the view of this WBCSD group, opportunities range from developing and maintaining low-carbon, zero-waste cities and infrastructures to improving and managing ecosystems and lifestyles. These changes are also considered to create opportunities for the finance and ICT sectors. There will be new opportunities to be exploited, different external priorities and partners to be engaged and many risks to be navigated and adapted to WBCSD, It is expected to be a time for smart systems and smart designs and thus, the smarter businesses will prevail. Adopting a systemic approach toward business and innovation is a necessity, rather than an exception. All man-made developments, including cities, infrastructures and transport networks will not be sustainable without long-term efforts to improve biocapacity and manage eco-systems. Important components of these developments are attitudes towards resources, ownership, goods and services. Changing these attitudes to embrace a more socially and environmentally responsible viewpoint is fundamental to a larger systemic shift towards sustainable social and economic systems. 1.5 The Role of Business Models in Radical and Systemic Eco-innovations Overall there is a wide range of economic opportunities for leveraging eco-innovation by placing it at the core of business strategies. To capture such future opportunities, to make them into a commercial success and to disseminate these good practices, both industry and policy-makers need to acquire a better understanding of the social, technical and political factors that enable or obstruct such eco-innovation (Figure 4). 16 Business Models for Systemic Eco-innovations

19 Among the key elements that determine the success of eco-innovation, a special focus needs to be placed on the business model, which brings eco-innovation to the market and promotes its dissemination. According to Osterwalder et al. (2010), a business model describes the rationale of how an organisation creates, delivers, and captures economic, social, and other forms of values. A business model is also an holistic approach towards explaining how firms conduct business (Zott et al., 2010). Figure 3 Role of various Factors in Eco-innovation Source: OECD The business model approach offers a comprehensive way of understanding how value is created and distributed. Eco-innovation aims to create both economic and environmental value, whilst business models act as value drivers and enablers of green technologies and solutions. The focus on business models enables a better understanding of how environmental value is captured, turned into profitable products and services and delivers convenience and satisfaction to users. In concrete terms, the analysis of the eco-innovation cases sheds light on whether, to what extent and how environmental values are reflected in their value propositions, customer segmentation, use of resources and collaboration patterns, as well as in managing cost and revenue streams. By replacing old business practices, innovative business models can enable firms to restructure their value chains and generate new types of producer-consumer relationships and to alter the consumption culture and patterns of use. Therefore the business model perspective is particularly relevant to radical and systemic ecoinnovation. With the grand challenges for green growth in mind, an investigation should be made into how business models and strategies can induce and help diffuse radical eco-innovation and enable systemic changes and transformation, along with an investigation of the business models of eco-innovation cases themselves. In addition, it is important to understand how policy can influence and facilitate the emergence of new business models that are effective in driving eco-innovation. The complex and systemic nature of a business model makes it very relevant to systemic innovations. By replacing old business practices, the innovative business models enable a complete restructuring of entire value chains and generate new types of producer-consumer relationships by, for example, altering the culture and traditions of consumption. All these radical shifts can provide promising potential for creating a long-term positive environmental impact. Business Models for Systemic Eco-innovations 17

20 There is a wealth of innovation literature about how companies have developed radical and transformative innovations, which have led to systemic shifts in technological regimes or even entire societies. Understanding the business models of the companies that are pursuing systemic innovation is the key to gaining insights into the drivers of, and barriers to, broader socio-economic transitions. These insights are also crucial in the context of analysing those companies that are implementing eco-innovations and of assessing their potential impacts on the shift to the green economy. Eco-innovation should create both economic and environmental value. The business model approach offers a comprehensive way of understanding how value is created and distributed. The focus on the business model in the context of the current study enables a better understanding of whether, and how environmental value is embedded in the strategic assumptions and operational planning of companies. In concrete terms, the analysis of case studies sheds light on whether, to what extent and how both economic and environmental values are reflected in the main building blocks of the business models of eco-innovative companies. Such building blocks include value propositions, customer segmentation, use of resources and collaboration patterns, as well as managing cost and revenue streams. In terms of systemic change, the business model approach also enables an investigation into how companies build wider partnerships in order to reduce costs and risks, as well as to achieve higher levels of implementation. This study focuses on companies that, while ensuring solid economic foundations, actively investigate emerging windows of opportunity to develop alternative solutions with better environmental performance that have the potential to lead to systemic change. On the one hand, this may imply a search for radical improvements in environmental performance in terms of resource productivity and emissions. On the other, it may lead to a complete re-design and re-think of the functionalities and ways of delivering services to customers that have a minimum environmental impact. From a broader perspective, governments around the world are increasingly recognising that business activities present a potential solution to major environmental and sustainability challenges such as protecting ecosystems, tackling climate change, as well as enhancing livelihoods and reducing poverty and other social problems (IIED 2009). This implies that governments, when setting up these marketbased activities, should create the circumstances that will assist companies to operate according to a business model through which they can make profits, whilst also contributing to meeting societal challenges. Business models may therefore act as a value driver and enabler of green technologies and eco-innovative solutions. With the enormous sustainability challenges in mind that require systems changes, the question is how business models and strategies assist radical and transformative eco-innovations and systemic shifts? 18 Business Models for Systemic Eco-innovations

21 2. Understanding Business Models for Eco-innovation In order to achieve green growth and sustainable development objectives, it is essential that radical and systemic innovations are widely diffused and replace old unsustainable practices. To accelerate the diffusion of radical and systemic ecoinnovations, it is necessary to understand how both the existing and the new ecoinnovative practices have been commercialised and disseminated. The importance of business models for the promotion of radical and systemic ecoinnovation is increasingly being recognised. However, a comprehensive understanding of, and structured knowledge on, this concept are still lacking. Little is known about the business models and strategies that can be used to integrate systemic ecoinnovations into the current realities, about the factors and players that have a role in this process and about the barriers that can hinder the successful diffusion and application of these innovations. The first step to bridging this gap is to visit the conceptual and empirical studies that are available in existing literature and try to learn from them. Insights from those empirical studies that contributed to the development of the analytical framework for this study are presented in Chapter 3, while this chapter presents the concept of a business model as it is defined and conceptualised in the literature. It discusses the findings of the empirical literature on various eco-innovations, the most common issues highlighted in the literature and the key lessons that are most valuable in the context of this study. The chapter concludes by outlining the persistent gaps and unresolved questions identified in the literature. 2.1 Defining Business Models The term business model covers a broad range of informal and formal descriptions of the core aspects of a business, including its purpose, products and services, strategies, infrastructure, organisational structures, trading practices, and operational processes and policies. Hence, it gives a complete overview of an organisation and the process of constructing a business model is part of any business strategy. Osterwalder (2004) argues that the term business model first appeared in 1960 in a journal on accounting. However, it was only after 1990 that the term became more widely used. The first peak in its use occurred during the Internet hype in the first decade of the current millennium. Osterwalder suggests that its use was inflated by its association with e-commerce, start-up companies and high-tech companies. Users of the term included executives, reporters, and analysts and it seems that they did not really have a very clear idea of what it meant. It was commonly used to describe everything from how a company earns its revenue to how its structures are organised. Despite the growing discourse and number of empirical studies, there is no unique definition or understanding of the business model that permeates the literature. The business and strategic management theories suggest several ways of understanding and interpreting the business model phenomenon and the existing definitions only partially overlap, thus offering space for numerous interpretations. Business models are considered in multiple ways that include: Interpreting business models as a conceptual framework, mode, or abstraction of the firm s current and future plans; Providing an intermediate layer of business understanding between business strategy and actual processes; Considering business models as tools for managing the firm or an intangible asset for supporting strategic decision-making; Business Models for Systemic Eco-innovations 19

22 Seeing business models as service logistics often presented as a flow chart; Applying business models to explain how the firm creates value for itself and its stakeholders. Despite these differences in conceptualisation, there is a common understanding of some issues that are presented below. These aspects help to develop a working concept of business models to analyse radical and systemic eco-innovation (Zott, et al, 2010): The business model is centred on a focal organisation, but its boundaries are wider ; It is considered as a system-level, holistic approach towards explaining how firms do business ; It seeks to explain both value creation and value capture. In the view of Osterwalder et al (2010) a business model describes the rationale of how an organisation creates, delivers, and captures economic, social, and other forms of values. From a structural viewpoint, the business model can be seen as a system compiling a company s business strategies and concrete operations that create and deliver value to the customers as well as to the firm. The components of business models typically include: strategic decisions on customer segmentation; products and services and associated value to offer; business, development, trade and other partners; resources to create, and channels to deliver, value; and underlying cost structure and revenue streams to ensure the financial viability of the business. To help to map these components Osterwalder & Pigneur (2010) propose a single reference model, called Business Model Canvass based on the similarities between a wide range of business model conceptualisations (Figure 2 The Business Model Canvass). Nowadays it is one of the most commonly used frameworks to describe the main elements of business models, which are a firm's value proposition, infrastructure, customers, and finances. The canvass also helps firms to align their activities by illustrating potential trade-offs. Figure 2 The Business Model Canvass Source: Osterwalder & Pigneur (2010) Business Model Generation The key element of a business model is the value proposition. According to Osterwalder, (2004), a company's value proposition is what distinguishes it from its competitors. The value proposition provides value through various elements such as newness, performance, customisation, "getting the job done", design, brand/status, price, cost reduction, risk reduction, accessibility and convenience/usability. One such 20 Business Models for Systemic Eco-innovations

23 potential value is offering greener, more sustainable, and environmentally benign products and services. Given increasing concern about environmental challenges and attempts to induce a shift to sustainable consumption, a growing number of companies are reconfiguring their business model to offer such values to their customers. The key activities segment of the canvass maps the most important activities in implementing a company's value proposition. Key resources are the assets, which the company needs to sustain and support its business. These resources can be human, financial, physical or intellectual. In pursuing its business, a company rarely works alone and often relies on a network of partners. Companies develop buyersupplier networks or alliances and joint ventures, in which each actor focuses on a specific activity. This optimises the operations and also reduces risks. Companies normally target certain customer segments in their business, which can be a narrow niche market, or a mass market or involve multiple customer groups. A company can deliver its value proposition to its targeted customers through direct or indirect channels like stores or distributors. Effective channels deliver a value proposition in a fast, efficient and cost-effective manner. To ensure the survival and success of any business, companies develop and maintain relationships with their customer segments by providing various services. The cost structure defines whether the business model is based on cost minimisation or on capturing value with a new product or service while revenue streams describe the ways in which the company makes an income from each customer segment such as sales, usage/subscription fees, renting/leasing or brokerage. While introducing innovations into its business model, a company can redesign some or all of the components of the model. This is an opportunity that is well-used by companies in their increasing efforts to shift to more sustainable and socially and environmentally responsible business strategies. In greening the business model or introducing a new eco-innovative business model, each of these components can offer numerous opportunities for environmentally-friendly considerations and changes. A number of efforts have been made to understand and conceptualise the business models that have a greener orientation and notably, the business model concept that has recently been adopted in the discourse on sustainable services (Halme et al., 2007, EPA, 2009). It is commonly used in studies on product-service systems (PSS) based models, which are defined as business models that have tangible products and intangible services designed and combined so that they jointly are capable of fulfilling specific customer needs (Tukker, 2004). FORA (2010), in its study of the eco-innovation experiences in the Nordic Region, refers to them as green business models. It defines them as business models which support the development of products and services (systems) with environmental benefits, reduce resource use/waste and which are economic viable. These business models have a lower environmental impact than traditional business models. This study further distinguishes green business models from classical green businesses such as cleantech, by highlighting the fact that the former aims to create economic and environmental win-win benefits for both the supplier and the customer. In general, however, the existing literature does not yet offer a comprehensive definition of business models for eco-innovation, which captures both the complexity of business models and the pervasiveness of eco-innovation. This study, while it cites the above definitions, does not limit its focus only to those business models covered by the existing literature. It also aims to cover an unconstrained spectrum of ecoinnovations centred on radical and systemic changes and to understand those business models that ensure the economic viability of the eco-innovations and the sustaining business rationale for those companies that are implementing these eco-innovations. Business Models for Systemic Eco-innovations 21

24 2.2 Business Models and Eco-innovation: The Lessons from the Literature Along with the increasing focus in the policy agenda on promoting eco-innovations, the number of research studies analysing various cases and types of eco-innovation has also been growing. Figure 3 illustrates this growth in publications over the last two decades that cover eco-innovation topics and related concepts such as resources saving and resource productivity and efficiency. Most studies have been dedicated to energy efficiency innovation and various issues around environmental performance. In addition, the studies have tended to use the term environmental innovation more often than eco-innovation (EIO, 2011). The literature provides many studies analysing the technical perspectives of ecoinnovation solutions and technologies with a focus on environmental benefits and lifecycle assessment. Although the majority of eco-innovation studies still focus on incremental innovations such as green products and eco-efficiency improvement, the systemic innovation concepts have been becoming increasingly evident, especially in the theoretical discourse. Figure 3 Trend in Publications covering Eco-innovation Source: Eco-Innovation Observatory, 2011, based on the Scopus data Radical and systemic change is also reflected in the growing number of empirical studies. These studies attempt to analyse various innovative solutions that have environmental benefits and exhibit a wider shift to more sustainable practice. Examples include alternative business models moving from selling products to selling services or functions, industrial symbiosis and eco-system solutions, solutions based on the cradle to cradle concept, which envisages products, technology, industrial processes, or settlements to be designed as a waste-free system based on the repeated circulation of materials in a way in which the natural metabolism functions. An economic analysis is often present in studies on eco-innovations but from a theoretical perspective. The business model and the commercialisation perspective are addressed in a rather unstructured and non-systematic manner. The exception here is the literature related to innovations based on the product-service system (PSS), also known as function-oriented business models, which offer a mix of products and services instead of the more traditional focus on products. This literature strand builds on a thoroughly structured variety of emerging business practices and provides a comprehensive analysis of the systemic changes these new business models can induce. While not speaking the business model language, other empirical studies discuss elements of business and commercialisation strategies and highlight those factors that are crucial for the business success of systemic and radical eco-innovations. These studies are very important to an understanding of the actual performance and role of business models for systemic eco-innovations. 22 Business Models for Systemic Eco-innovations

25 Figure 4 Business Models for Eco-innovations covered by the Literature Review Functional sales is a generic model with common characteristics for all service based business models focusing on providing the function and benefits of the product instead of the physical product as such. Instead of paying for the product per se, a consumer pays for the function of the product. The service provider controls the use-phase of the product. This creates an incentive to improve the output yield and to extend the life-span of the product by making the product more durable, reducing the need for spare parts, making it more energy efficient and improving the maintenance of the product (FORA, 2010). Energy service companies (ESCO) provide energy-efficiency-related and other value-added services and assume performance risk for their project or product. Their compensation and profits are tied to energy efficiency improvements and savings in purchased energy costs (EPA 2009). Chemical management services (CMS) is a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer's chemicals and related services. Under a CMS contract, the provider's compensation is tied primarily to the quantity and quality of services delivered, not to chemical volume (EPA 2009). Integrated pest management (IPM) and performance based pest management (PPMS) models assume that a pest management services provider commits to achieving a certain standard or level of pest control, rather than being compensated for a particular treatment or application (EPA, 2009). Sharing or renting based business models in which the basic idea is that instead of private ownership, the product is shared among a number of users, whenever the individual user needs access to the product. The examples can include car-sharing, car-pooling, sharing of holiday houses and laundry facilities. In these sharing models, the consumer does not pay for buying a product but only for using it (FORA, 2010). Design-build-finance-operate (DBFO) model is a contractual relationship between a customer and a private contractor used for construction projects requiring long-term investments. Most of the DBFO model is a form of Public-Private Partnership (FORA, 2010). Industrial symbiosis is based on a shared use of resources and by-products amongst industrial actors through inter-firm recycling linkages. The waste of one company becomes another s raw material. The aim of industrial symbioses is to reduce the costs and environmental impacts of participating companies (FORA, 2010). Eco-city is a complex urban system combining many eco-innovative solutions. An eco-city is designed with a consideration of environmental impact, inhabited by people dedicated to minimising the inputs of energy, water and food, and waste output of heat, air and water pollution. Such a city can ideally feed itself with minimal reliance on the surrounding countryside, and power itself with renewable sources of energy (Wikipedia). Cradle to cradle (C2C) based business models centre on an holistic design and production paradigm and strive for a society that produces no waste and recycles everything. They relate also to closed loop and recycling concepts. The concept is based on a bio-inspired approach to the design of products and systems where nature is seen as a closed loop production system with solar energy as the only external input. It stimulates innovation through the development of new products with a competitive edge (FORA, 2010). ICT solution based models provide a wide range of solutions for energy and resource use control, the establishment of smart grids and cloud computing. ICT is also an important part of many novel technologies and systems solutions like industrial ecosystems and green mobility systems. Telepresence/videoconferencing services is one of the business models built on ICT innovations which enables people in different locations to communicate in face to face exchanges and which is far superior to traditional video-conferencing. The main environmental benefit is that it avoids extensive travel and associated eco-footprints (EPA, 2009). Urban transport system based on bio-gas is the bus and car system that has switched fully from fossil based fuel to the bio-gas/bio methane. The system contains several elements, including: Bio-gas production using organic industrial and agricultural waste such as food and manure and also sewage waste; Specifically adopted transport such as buses, cars and lorries; An infrastructure for fuelling through bio-gas filling stations; An infrastructure for storing and transporting the bio-gas. Electric car based mobility system includes all necessary facilities including battery charge/replacement facilities and additional IT/GPSR technologies for the mass application of electric vehicles. It often incorporates a full car sharing/renting system. Source: Compiled by Technopolis Group Business Models for Systemic Eco-innovations 23

26 The literature covered in this report includes empirical studies that analyse and synthesise several cases studies, as well as others based on single cases of ecoinnovations and business models. In reviewing the empirical studies, a variety of PSS based models were noted, namely: functional sales energy service companies (ESCO); chemical management services (CMS); integrated pest management (IPM) and performance based pest management (PPM) services; Sharing or renting based models; and Design-build-finance-operate (DBFO) models. Other cases are based on product and process eco-innovations that are different in scale and sophistication. The scope ranges from ICT solutions, which increase efficiencies in performing specific tasks and thereby save on resources and emissions, to large-scale complex projects like industrial symbiosis and eco-cities, based on a system of eco-innovative solutions. Figure 4 presents a systematic overview and definitions of each type of business model for eco-innovations that is discussed in the literature. The literature review produced a number of insights that directly and indirectly address the business model perspective in the promotion of eco-innovations. The analysis presented in the following sections outlines the insights and lessons learned that have been oriented to both the business and research communities. The most relevant issues that are discussed and reflected in the analysis are: Value capture and creation; Sustainability benefits; The role of enabling technologies and infrastructure; Corporate governance and strategy; The role of policy; Barriers and drivers; Systemic changes Value Capture and Creation Value creation, both for the company and the customer, is at the heart of any business model. The type or form of the value created can be the most important factor behind the viability of any new product, service or technology introduced onto the market. Generally in eco-innovation literature the value creation or value capture concept is not framed and named as such, but its nature can be inferred from the discussion of the economic and social benefits of a particular eco-innovation. An exception is the product-service system studies carried out by Tukker (2004) and EPA (2009) that pay serious attention to the discussion of value creation in service oriented business models. This discussion is along the lines of tangible value such as cost reduction and resource saving versus intangible value. The latter can include examples such as the improvement of the environmental image of the company, minimisation of potential financial risk for clients and the extra convenience and comfort that are associated with new services or products, and other priceless experiences. From the company s perspective the economic value capture through finding new business opportunities, new markets and new revenue streams is a natural aim of any business activity, including those involving eco-innovations. Since the seminal work of Porter (1991) that considered the economic benefits that derived from the improved environmental performance of companies, the literature has highlighted an increasing number of empirical examples of companies that have discovered business opportunities linked to sustainability, greening and eco-innovation. Now, many companies have shifted from viewing their environmental obligations as a burden to seeing the new values to be captured while greening their business activities and producing eco-innovative goods and services. The literature demonstrates that the rapid growth in demand for clean technologies and green products and services offers great potential for new revenue streams in both 24 Business Models for Systemic Eco-innovations

27 old companies that are adjusting their production patterns and new start-ups that have been established solely to tap into green markets. For example, the studies by Tukker (2004), EC and COWI (2008), EPA (2009), FORA (2010) and Bowden et al (2009) show how a new generation of companies has been emerging that focus on providing new type of services, which promote material and energy efficiency, cut associated emissions and reduce the clients overall ecological footprints. Studies of Meenakshisundaram and Shankar (2010) and OECD (2009) show that companies are tapping into the businesses fostered by sustainable mobility initiatives. Eco-city and industrial symbiosis practices are creating business opportunities for eco-design, ecoengineering and sustainable construction companies (Johnson and Suskewitcz, 2009; Martin, 2009, Van Berkel, et al, 2009). In addition to traditional economic value creation, adopting more sustainable business models and eco-innovations provides a range of other benefits or values for companies. For example, when companies cooperate in industrial symbiosis they get access to cheaper inputs and reduce their waste management costs, which in turn strengthens their competitiveness. In addition, they create a demand for technologies and systems that enables the exchange not only of materials and energy, but also of knowledge. Thus, a new market with global export potential is created (FORA, 2010). EC and COWI (2008), FORA (2010) and Bowden et al (2009) also suggest that branding and reputation are other important values that companies gain by implementing sustainable business models and promoting eco-innovations. With the increasing awareness of consumers and the imposition by public service clients of environmental standards for procurement, these values are becoming important competitive advantages for companies. As outlined above, in the business model the value proposed for the customers can have different tangible and intangible features. The value proposition can be understood as a solution that targets customers needs or solves their problems. Osterwalder et al, (2010) discussed such values as being: the newness of the ecoinnovative product or service; its improved performance, customisation and convenience in comparison to existing alternatives; improved design; better price; potential cost reduction and savings; higher accessibility; offering a result or function instead of a product; and many other things that make the product or service attractive to customers and create a preference for that product or service, as compared to the alternatives. Often the value of the product is increased by combining it with services or by the complete substitution of the product with a service. In the context of the literature on eco-innovations, economic benefits through resources and cost saving appears to be one of the most commonly mentioned value propositions. The analyses in the studies often address the question of how the value creation and economic benefits can be delivered alongside sustainability outcomes. However, in measuring the environmental benefits, it is frequently discovered that the company and its customers have managed to reduce internal costs or consumption or materials or procure products that are more energy and/or resource efficient and have longer life spans. Other economic benefits mentioned in the literature are related to avoidance of costs, the minimisation of administrative expenses and reduced safety costs. In serviceoriented models, such as ESCO, CMS and renting and sharing, the advantage to the customers is that they do not have to bear the investment costs and associated investment risks - the operational costs are known in advance and are also transparent. Alongside investment advantages, there is a reduction in risk costs related to work safety, the production process, deliverance and dead stock. In car sharing, members can save considerable amounts of money annually by using the company s mobility services (FORA, 2010). Cost-saving benefits have been also Business Models for Systemic Eco-innovations 25

28 demonstrated in eco-service models such as telepresence/videoconferencing, equipment sharing 4 and car-rental. (EPA, 2009, Berhrendt, et al, 2003) Offering functionality instead of a product is another way of framing a business model. There are a growing number of innovative business models that substitute the sales of, often unaffordable, products by offering their functionalities to customers. Such functionalities are normally framed as a result, experience, performance based service, which is often referred to as Getting the job done. Examples of such functionalities are: Selling drive-miles instead of renting out cars in the car sharing business models; Lease-like see through insurance instead of windows; Selling comfortable walking instead of floor carpets; Performance based pest management models in which the company sells certain standards, such as a low level of pests or a high harvest, rather than being paid for particular pest control activities. Additional comfort and flexibility is another value that customers acquire via many business models and the innovative designs incorporated into them. For example, the success of the city bicycle-sharing system that is being increasingly introduced into many cities is largely due to the convenience and ease-of-use of this system. In addition, the system enables customers to access bikes at any time of the day or night and its proximity to, and linkage with, other modes of public transportation provides a high degree of flexibility for customers (OECD, 2009). Key lessons: In the business model for eco-innovation, economic value is the most important, both for the company and its customers; Eco-innovations can offer companies increasing opportunities to capture economic value through finding new business opportunities, new markets and new revenue streams; Adopting more sustainable business models and eco-innovations provides a range of other benefits/values for companies that strengthen their competitiveness. These include increased saving of resources, cuts in associated cost and a reduction in waste management costs; Larger scale systemic eco-innovations like industrial symbiosis and eco-cities create a demand for technologies and systems that enable the exchange of not only materials and energy, but also of knowledge; Creating and offering value for customers is central to any business model. By offering novel values, companies can gain a larger clientele and reach new market niches Sustainability Benefits Environmental impacts are among the most thoroughly assessed issues in each study. Some authors suggest a structured methodology for the evaluation of the environmental benefit of every type of business model. See for example Tukker (2004), who used the sustainable design rules approach in evaluating each type of PSS model against a set of impact reduction mechanisms (Figure 5). He found that most of the PSS types result in environmental improvement in the short-term however these are rather modest. Improvements tend to be incremental and mainly average at best and are mainly related to economic efficiency gains and hence might be less relevant for human-resource intensive systems (Tukker, 2004). Radical 4 commonly know examples of which are a communal washing machines 26 Business Models for Systemic Eco-innovations

29 improvements can only be expected in the case of models based on promising functional results 5. The exception is those types of PSS systems that make users less responsible for the careful use of a product, such as product leasing (Ibid, 2004). Figure 5 Relevance of Impact Reduction Mechanisms per PSS type Source: Tukker (2004) In contrast to this study, many other studies of PSSs provide more optimistic judgements of the environmental and sustainability impacts. Their findings reveal the following positive improvements in comparison to traditional product based practices in which products or materials are bought and managed by the user company: Reduced resource and energy consumption and associated ecological footprints; Reduced carbon and chemical emissions to air; Reduced spills of water; Reduced chemical waste and improved disposal; A change of attitude towards more sustainable behaviour. For example, EPA (2009) and FORA (2010) in their studies on new types of business models have estimated that in the functional sales models, it is possible to reduce 50-60% or more of the resources needed for production and life-span operation of the product by improving the design of a product. In addition to the energy saving and associated greenhouse gases reduction, ESCO projects were proved to create improvements in the indoor air quality, which also provided a healthy working environment. As stated by Halmea, et al (2007) and FORA (2010), the novel business models also tend to create incentives to maintain environmental improvements in the long run. For instance, DBFO models create incentives to reduce energy costs due to their total life-cycle approach and to invest in environmental efficiency in the long run. CMS creates incentives for the reduced use of chemicals, the substitution of hazardous chemicals and also the potential for a Cradle to Cradle set-up. Renting and sharing schemes provide incentives to design the product to withstand impacts from multiple users, improve durability and quality and make remanufacturing possible, which in turn reduces the product volumes and the associated need for virgin resources. In many of the cases discussed, the business models contribute to a faster introduction of environmentally friendly technologies and products, such as the use of renewables, the replacement of oil and gas and the application of more sustainable (bio-) materials. Through the mobility services, customers get access to electric cars that they might otherwise be reluctant to purchase because of the high initial investment costs and uncertainties of performance. (Johnson and Suskewitcz, 2009; FORA, 2010) 5 In this model the provider agrees with the client on the delivery of a result. The provider is completely free to choose how that result is then delivered. Typical examples of this form of PSS are companies who promise farmers a maximum harvest loss rather than selling pesticides (Tukker, 2004). Business Models for Systemic Eco-innovations 27

30 At the same time, many studies including FORA, 2010, Tukker & Tischner, 2004 and EPA, 2009 indicate an awareness of the fact that the environmental benefits associated with certain green business models depend largely on the way in which the products are used. Sharing of products may entail negative environmental impacts, if the access to a shared product increases the customers use of the product. For example, car-sharing members getting access to a car to which they otherwise would not have had access, or if the fuel consumption involved in picking up the shared item exceeds the environmental benefits gained from the product sharing. Key Lessons: Environmental benefits are an important feature of the business models for eco-innovation and are increasingly being framed as an attractive value proposition within the business models; Environmental benefits are often accompanied by economic benefits and cost savings; Novel business models can create incentives for companies and customers to maintain long-term environmental improvements; Many business models contribute to a faster penetration of environmentally friendly technologies and products into the markets; Environmental benefits associated with certain green business models depend largely on the way in which the products are used by customers The role of Enabling Technologies and Infrastructure In their study of how to promote systemic eco-innovation, Johnson and Suskewitcz (2009) focus on the role of enabling technologies in creating systemic shifts. The era of railways was catalysed by the invention of the steam engine and the creation of the microprocessor launched the information age. However, the real impact was felt only after the systems, in these cases railways and the communication infrastructure, had evolved around them. It is also well established that the new technology that fits best with pre-existing technologies or systems will be adopted more easily and diffused more quickly. This is referred to as a drop-in approach to innovation (Kemp, 1994). Radical and transformative innovations are complex in nature and have linkages and dependencies between many components of the system and so they cannot be easily dropped in and diffused. Therefore, the improved availability and the development of supporting infrastructure and technologies are very important if the innovation to survive and succeed. Empirical cases have also produced convincing evidence of the importance of enabling technology and supporting infrastructure, which often become the main success factors behind certain business models. The literature also highlights the role of ICT technologies that minimise inconveniences for customers and maximise the efficiency of the system. For example, the bike-sharing systems that were reviewed by OECD (2009), are supported by internet maps showing real-time data on the availability of bikes and parking spaces at certain stations at any time of the day. The software used in the electric cars, which was designed and developed by Better Place, provides complete information for the drivers. It displays the energy level in the battery, locates the nearest battery recharging and swapping facility, and also enables the drivers to handle their booking, parking and charging spots conveniently (Meenakshisundaram and Shankar, 2010). Similarly, many service oriented business models, such as energy saving companies and telepresence are very much dependent on the ICT technologies that control and regulate the energy consumption in private homes, offices and industries or enable high end videoconferencing (EPA, 2009). Novel greener solutions are increasingly becoming of interest to ICT companies, which see more and more business opportunities emerging in this area. 28 Business Models for Systemic Eco-innovations

31 The availability of supporting physical infrastructure is also often an important factor for eco-innovative solutions. The success of the Linkoping bio-gas based transport system was largely thanks to the specifically designed refuelling station systems, both for public buses and private cars (Martin, 2009). The Better Place electric car system has developed an automated battery swapping facilities which can replace depleted batteries with charged batteries within three minutes without any need for the driver to get out of the car. Key Lessons: Enabling technologies and support infrastructure play fundamental roles in the success of many business models for eco-innovation; The role of ICT has been very remarkable and has been growing over recent years. It is central to many service based eco-innovative business models and enables the effective monitoring of resources, emissions and inputs, as well as the coordination of activities; Novel greener solutions are increasingly becoming of interest to ICT companies, which see more and more business opportunities emerging in this area Corporate Governance and Strategy The analysis provided in the eco-innovation studies highlights a number of factors associated with companies that implement eco-innovations including their internal governance, the strategies that they adopt and the societal values that they promote. Alliances with other Stakeholders The empirical evidence has demonstrated that many companies implement their ecoinnovations in cooperation with other companies, as well as with the local authorities. For instance, Better Place entered into alliances with electric car manufacturers, battery manufacturers and renewable energy producers. Such alliances were seen as win-win opportunities for all concerned (Meenakshisundaram and Shankar, 2010). Also Johnson and Suskewicz (2009), Martin (2009), Yang and Feng (2007) and Van Berkel et al, (2009), discussed cooperation with local authorities. This is often a prerequisite for large-scale projects like industrial or urban symbiosis or establishing a city bio-gas transport system. Good communication among partners is critical to the success of some projects and is often more important to their success than technology. An evident example is industrial symbiosis, which normally involves several companies and organisations. Christensen (2004) stresses that the communication in Kalundborg was facilitated by the small size of the community involved, the established acquaintances between the managers, the open, non-secretive management style of the companies and the opportunities for cooperation in projects. The Style of Governance The style of the company governance, including the shifts in corporate social responsibility (CSR), was underlined as another important factor. (Louche et al, 2010; Carillo-Hermosilla, 2008) While previously CSR was understood and addressed as a way of creating a particular image for a company, it is increasingly being perceived as a driver of innovation. Many companies have started to engage in CSR as a core aspect of their innovation with the strategic inclusion of social and environmental concerns into their core business models. Company Leadership Many studies such as those of Confino, (2011) and Louche et al, (2010) have established that the dedication of the leadership of companies is an important driver for assimilating changes and introducing such concepts and systems as cradle-tocradle or closed loop. In the case of the Good Water company, thanks to the will of the company leadership and its dedication to sustainability goals, the company Business Models for Systemic Eco-innovations 29

32 invested in introducing an up-cycling system 6 and more sustainable bio-plastic into bottled water production (Bowden et al, 2009). Similar examples of dedicated leadership come from many other case studies (see Carillo-Hermosilla, 2008; Christensen, J., 2004) 7. Key Lessons: Eco-innovation projects and business models are often influenced by the internal governance of companies, the strategies that they adopt and the societal values that they promote; Partnership networks with other companies and public authorities are important to the success of the eco-innovation projects. Such partnership need to be based on win-win opportunities for all partners; While previously CSR was understood and addressed as a way of creating a particular image for a company, it is increasingly being perceived as a driver of innovation; The dedication of the leadership of companies to the ideas of sustainability and environmental responsibility has proved to be an important driver for new eco-innovations, greening the businesses and assimilating changes in companies The Role of Policies Policy has long been central in moving the next-generation of technologies forward, as well as in promoting radical eco-innovation and systemic changes (Scrase et al, 2009). The role of governmental policy, especially support via national or local level governmental measures, is repeatedly stressed in the case studies. Detailed discussion about specific policy instruments and how they support eco-innovations has been less pronounced, but is still indirectly addressed where the importance of framework conditions is highlighted Policy Support at National Level Studies show that by shifting to functional direction and focusing on resource conservation and environmental protection, national policies do encourage corporations to adjust their strategies in order to improve competitiveness. For example, in their study Yang and Feng (2007) outlined how the creation of an industrial ecosystem in the paper production industry in China has secured a firm footing by following the national policy of centralised pulping and scattered papermaking industries. Similarly, van Berkel et al, 2009 argues that the Eco-Town Programme that promotes urban and industrial symbiosis in Japan was boosted when the government put in place a comprehensive legal framework to become a Recycling-Based Society 8. The availability of investment subsidies, the entering into force of ambitious recycling legislation with quantified, product-specific targets, improved access to the significant technological resources of the private sector, and the widespread recognition of the urgent need to act on environmental issues, all contributed to the success of the Eco- Town Programme. Johnson and Suskewicz, (2009), Reiche (2010), Chertow et al (2004), Carillo-Hermosilla (2008) and other authors have presented many other 6 The up-cycling concept is used to describe recycling systems in which the used or to be recycled product is recycled into a new product that has the same or better qualities than the product that was recycled. This allows it to enter the same production chain, or to be used in superior production chains. In most of the recycling practices the products are down-cycled to another product with poorer qualities, which sometimes prevents them from entering secondary recycling. 7 See for example Desso and InterfaceFlo carpet manufacturing companies 8 The Basic Law for Establishing a Recycling-Based Society came into force in January It provides quantitative targets for recycling and dematerialisation in Japanese society 30 Business Models for Systemic Eco-innovations

33 examples of large-scale eco-innovative projects aiming to produce systemic shifts that would not have taken place without strong political support from the national government, clear visions and objectives, and high levels of regulatory stringency Policy Support at Local Level The implementation of many eco-innovative projects requires the active support and involvement of local government and municipalities. Their political will has also been a strong driving force in many cases. The study by Martin (2009) on the large-scale, bio-gas based transport system in the Swedish city of Linköping, which includes the entire network of buses, trains and private cars and the refuelling infrastructure, proves to be one such case. Since the start of the project, the local politicians have continued to drive the development and support the research around the bio-gas based transport system. 9 The success of this system has resulted primarily from political consensus and the municipalities firm belief in the project. The creation of specific market conditions for companies by local authorities also helps to sustain specific projects. This was certainly the case for an advertising company, which was given a monopoly advantage over a large section of billboard advertising in Paris, in return for operating the bicycle sharing system in that city (OECD, 2009) Supportive Framework Conditions Other framework conditions also play a substantial role in supporting the long-term economic viability of eco-innovations, especially when they help to provide stability and certainty. Economic opportunities for eco-innovative solutions and practices can only be unleashed with regulatory certainty - for example with certainty regarding the price of carbon. While many companies are already moving to a lower carbon economy, they are prepared to invest even more. In this regard, Meenakshisundaram and Shankar (2010) argue that to stimulate companies to invest in eco-innovations and green business practices and to start new projects, the state should ensure a regulatory environment that provides policy incentives on one hand and which offers a stable, long-term provision of these incentives, on the other. Such clear and long-term policy targets in environmental, energy and sustainable industrial areas sends businesses a positive signal about the long-term business opportunities in these areas. Similarly, this clear and stable regulatory provision can send the market a signal about how to price carbon or tax resources, which helps to ensure a level playing field with no competitive distortions or disruptions to trade. Key Lessons: Policy support is central in moving the next-generation technologies forward, as well as in promoting radical eco-innovations and systemic change; The role of national and local (regional, municipal) policy initiatives can be equally important in introducing eco-innovations; Many eco-innovative developments bringing both incremental and systemic change have taken place thanks to strong political support from national government, that provides a clear vision and objectives and a high level of regulatory stringency; Dedicated support, the creation of favourable conditions fuelled by the political consensus and a firm belief in the project on the part of the local governmental bodies largely defines the success of many eco-innovative initiatives and projects. 9 Bio-gas has never been a contentious issue in Linköping. It has always enjoyed broad support in the municipality, and that has carried us to where we are today the words of the City Commissioner of Linköping (Martin, 2009) Business Models for Systemic Eco-innovations 31

34 2.2.6 Systemic Change and the Role of Eco-innovation It is recognised that systemic transformation does not happen easily. Due to their complex and interdependent natures, radical and systemic innovations have to rely on many changes in the various components of a system. Thus, it is not surprising that there are not very many examples of systemic innovations and those that do exist are easy to criticise (Johnson and Suskewitcz, 2009). In the literature, some examples certainly exhibit a potential for systemic change. While novel technology is an important factor, technology alone cannot bring about radical change. The studies point at the soft factors that make or help the technology to bring about this type of change. These soft factors are about shifting to alternative practices, changing consumers attitudes, moving to a different system of ownership and breaking with traditions. This is featured in the context of service based ecoinnovation business models in the studies of FORA (2010), Tukker & Tischner (2004) and EPA (2009). Their focus was not purely on the technology, but rather on changing the traditional practices of doing business, as well as on changing customers habits so that resources are used more efficiently, while functions or utilities are still delivered. Although the immediate environmental impact might not be so dramatic (see 2.1.3), it is the changes in thinking and doing things differently and in making other agents in a system perform differently that brings about systemic transformation. Some studies also show that, along with social and behavioural changes, what is often required is changing, upgrading or introducing an adjacent technical system, which makes the eco-innovation viable in the long run. As has been discussed above, enabling technologies and supporting infrastructure are a part of the larger system. In this regard, the eco-innovative mobility scheme based models that are considered by Martin, 2009, Johnson and Suskewitcz, 2009 and OECD, 2010, are striking examples. Without well-adjusted or properly adapted technical infrastructure, such as battery exchange and special parking stations, and software systems, like GPSR and online monitoring, these schemes would not be able to succeed or to make a larger impact. In case of large-scale complex eco-innovations, like industrial symbiosis and ecocities, systemic change is one of their core objectives. This change is all about breaking established traditions in industries and urban planning, altering the prevailing practices of industrial and public actors and shifting from linear to circular systems of production and consumption. Such action requires a re-thinking and re-designing of the value chains, production and organisational and business strategies and a reevaluation of the resources, products, by-products and waste. The change in these examples is also about building new tighter, inter-dependent and mutually beneficial collaborative networks and this requires sophisticated organisational capabilities. Technological innovation, which is a crucial part of industrial symbiosis and eco-city designs, is also part of the systemic change. It should be noted that in these models the systemic change is deliberate, as it is planned, fostered and steered by a consortia of partners. It is also largely aided by a leadership philosophy that is oriented towards greener sustainability. Key Lessons: Systemic change is more apparent in eco-innovations that facilitate a shift to alternative practices of delivering functionality, change consumers attitude, move to a different system of ownership and break with existing traditions; The role of technology in systemic change is important but it contributes to systemic change only in combination with the soft factors mentioned above; Systemic change is at the core of complex eco-innovations like industrial symbiosis and eco-cities, in which it is clearly framed and deliberately steered; Mutually beneficial collaboration and building long-term partnership networks are essential conditions for fostering systemic change through such initiatives. 32 Business Models for Systemic Eco-innovations

35 2.2.7 Barriers inhibiting New Business Models for Eco-innovations The section above discusses the importance of policies, enabling technologies, and corporate governance to the success of new eco-innovative business models. However, there are several other factors that determine the viability of business models or which create obstacles and these are discussed in this section. The literature shows that green business models face a range of barriers on their way to implementation, which can be distinguished as being internal and external to a company Internal barriers Internal barriers (Carrillo-Hermosilla (2008), FORA (2010) and EPA (2009)) include: A traditional mindset among producers and providers and a lack of competences and knowledge of sustainability issues; An insufficient number of reference cases; A lack of knowledge of possibilities on the part of higher management; A lack of integration between divisions in companies, for example, a division that develops a product and the people that develop the services or separation between organisational bodies for investment and the operation in organisations; Increased development and production costs; Insufficient R&D capabilities. Few organisations have the necessary vision, organisation and budget to risk certain costs, such as implementation costs, in return for uncertain benefits, such as reduced risks and revenue growth. Organisational boundaries may also exist as, for example, the Procurement Director is given incentives and rewards for cost reductions but not for risk reduction or contributions to revenue growth. (FORA, 2010; Tukker & Tischner, 2004; Carrillo-Hermosilla, 2008) Confino, (2011) argues that even more progressive businesses remain unconsciously aligned to, and locked into, the old-style economic model based on unending growth is one of the most important barriers, which inhibits more radical approaches and shifts. Many companies are too comfortable with their existing business models to leverage the crucial systemic change that is needed for sustainable progress External Barriers The literature also contains considerable information about the external barriers to the emergence and success of business models for eco-innovation. Many ecoinnovations and sustainable businesses do not get sufficient support and stimulation because of failures in the framework conditions. According to FORA (2010), Tukker & Tischner (2004) and Carrillo-Hermosilla (2008) these can include: A lack of market-pull due to the limitations of environmental tax regulations, the lack of green public procurement practices, old fashioned routines and red-tape amongst politicians and public procurement staff; and a lack of regulation and general government support for changes; A lack of capital for initial investment and for implementation, which is often due to the fact that projects are perceived to be risky or there is a lack of knowledge amongst stakeholders about the economic benefits of greening. In addition, the new business models face challenges in form of market suitability, the need for supplementary infrastructure, competitors and substitutes, and the threat of technology changes (Martin, 2009; Meenakshisundaram and Shankar, 2010). Confino (2011) notes the importance of the investment community to the promotion of company innovation. Investors effectively control developments in businesses and therefore their reluctance to support radical or sustainability-oriented changes is a serious barrier to the introduction of eco-innovations into ongoing business activities. Business Models for Systemic Eco-innovations 33

36 As Martin, (2009) and Meenakshisundaram and Shankar (2010) argue, the adoption of eco-innovations and shifts to new systems are also heavily dependent on consumers attitudes and readiness. For example, it is likely that consumers who have become used to the luxury provided by large, petrol engine powered automobiles and their various features and functions, would not be very impressed by the electric cars or less luxurious cars offered by the car-sharing schemes. The customer s lack of trust in suppliers may be another reason Gaps and Unresolved Questions The discourse in the literature on business models for eco-innovation is still at an early stage of development, while the literature on business models and on eco-innovation has been developing rapidly. There has not been, however, significant exchange and learning between the two areas. The literature uses different language, concepts and definitions, as well as different research approaches. The service oriented green business models, most often known as Product-Service Systems (PSS), can be considered as an exception as they do use business model terminology and have developed in-depth conceptual and empirical materials. In contrast to this, systematised knowledge on business models associated with non-service oriented systemic eco-innovations is largely lacking. Also, with regards to the more general business and commercialisation perspectives of systemic eco-innovations, there is a need for more experience based cases. These are, for example, the implementation of cradle to cradle principles in business models, engagement in industrial symbiosis, the implementation of spatial or horizontal ICT applications, technologies and systems based on bio-mimicry principles and cases of sustainable cities and sustainable agriculture, both on larger and smaller scales. Many companies lack the knowledge and competences to redesign their operation, products and services in a way that will dramatically reduce their environmental impact and, at the same time, bring economic benefits to both the producer and the end-user. In this respect, the companies and organisations, as well as the local authorities and city management bodies need to have a well-developed knowledge of materials and processes and their interconnectedness (FORA, 2010). In addition, more knowledge on those successful policy interventions, which facilitated radical shifts towards more sustainable systems and created market pull for these shifts, needs to be documented and systematised. More analyses need to be carried out on the potential of, and barriers to, systemic and radical eco-innovations and associated business models and commercialisation strategies. This study aims to contribute to existing knowledge by proposing a conceptual framework, which merges concepts from the business literature with the ecoinnovation related knowledge, as well as by organising the knowledge on various types of radical and transformative eco-innovations and the business models that support them. The study is based on a unique set of empirical cases from across the OECD. 34 Business Models for Systemic Eco-innovations

37 3. Towards the Conceptual Framework of Business Models for Eco-innovation 3.1 Business Models and Sustainability Business models combine all the core components of business strategies and operations to create and deliver value to the customers. The components of business models typically include strategic decisions on customer segmentation, products and services or value propositions to offer, business and research partners to engage with, resources to create and channels to deliver value, as well as the underlying cost structure and revenue streams to ensure the economic viability of the business. Business models, whether explicit or implicit, underpin all business plans and ventures. In order to strengthen, or simply retain, their market position companies have to continuously rethink their business models. Business model innovation is about staying in the game, being at the forefront or simply remaining competitive, whilst ensuring the economic viability and profitability of the company s operations. In this context, business models can be adapted gradually or they can be changed radically. Radical changes include major alterations to the value proposition, revisiting the customer base or redefining the services and products delivered by company. Such changes involve a high risk and include a degree of uncertainty, which makes them difficult for most companies to pursue. Business models most often change gradually and do not entail a fundamental revisiting of the value propositions. The changes tend to focus on improving production processes or reconfiguring organisational structures. In the typical approaches to business models, environmental sustainability is very rarely at the core of value propositions. The business community may increasingly recognise the problems of climate change and scarcity of resources but these issues are not automatically internalised into all the building blocks of the company s strategy and operations. The green values are now commonly used in marketing strategies but they are not necessarily linked with a genuine integration of sustainability into the company s core operations and hence the notion of green washing. This is because most businesses do not consider environmental sustainability as being a key source of value. In effect, they often perceive it as a challenge or even an unwanted cost. The mainstream thinking about business models is not concerned with issues of environmental sustainability, just as mainstream thinking about business is not primarily driven by environmental concerns. Environmental concerns are primarily seen to be an external challenge to existing business models, which may lead to changes in the way business is done. Typically, the motivation behind such changes is often current, or expected, regulatory pressure or significant changes in the prices of energy and raw materials, which may put the company s cost structure and revenues at risk. In this context, how can sustainability fit into the logic of business model design? F0llowing typical business thinking, sustainability can become an integral part of business models only if it can deliver additional value to the company and its customers. Therefore, on the one hand, the value of sustainability has to be translated into sustainable revenue streams or reductions of the company s costs in the future and, on the other, the environment has to be considered to have value in its own right. Eco-innovation is an appropriate concept in this respect as it brings together both economic and environmental values and requires both dimensions to be considered. 3.2 The Definition and Key Components of Eco-innovation Business Models Eco-innovation business models are business models designed to deliver value to customers by providing eco-innovative products or services. The proposed conceptual Business Models for Systemic Eco-innovations 35

38 framework should shed light on how the logic of business model design can incorporate sustainability and be geared towards radical eco-innovations. In order to do so, the conceptual framework goes beyond analysing the business models of individual companies and incorporates the perspective of the value chain. The approach also includes the notion of wider impacts and framework conditions, such as the relevant regulations and access to finance, so as to better understand what drives companies to, and what stops companies from, considering radical eco-innovation as a viable alternative value proposition. Figure 6 proposes an extended business model canvass incorporating the notion of wider impacts as well as different types of value, including notable economic, societal and environmental value. The following sections outline individual components introduced into the extended model, which helps to set the framework to analyse eco-innovation and its underlying business model. Figure 6 The Extended Business Model Concept Source: Technopolis Group based on Osterwalder & Pigneur (2010); perspectives of value creation along the value chain and wider impacts added by Technopolis Group Value Creation The focus in the analysis of business models is invariably on value creation. The business models literature focuses, in particular, on the value proposed to the customer or the value propositions and the value captured by the company. The approach in this study adds to these the implications of different business models on value creation upstream in the value chain of partners and suppliers. This exercise enables the potential impact of various business model approaches to be identified and indicated at specific phases of the value chain. There are different types of value considered in this approach: economic such as monetary cost and revenue streams, social and cultural including human and social capital, symbolic values related to social status and wellbeing and knowledge and learning value that also covers market and strategic intelligence, as well as environmental benefits like reduced impacts or positive impacts on the environment. 36 Business Models for Systemic Eco-innovations

39 There are at least two ways in which companies can embed eco-innovative considerations into value propositions. These are, on the one hand, cost reduction and, on the other, new value creation. 10 The two strategies overlap in practice, whereas the degree to which either approach dominates may differ within individual companies, such as those with multiple business models, and across value chains. Cost reduction models focus on improving both the economic and environmental performance of existing company processes and products. These approaches have clear economic and potential environmental benefits, as companies improve their productivity through more from less, while reducing the use of energy and natural resources, as well as limiting their CO2 emissions. Eco-efficiency innovations are most often related to changes in company activities, such as applying lean manufacturing and other material efficiency approaches, but they may also involve reconfiguring value chains and relationships with suppliers in order to improve efficiency. The model may imply disruptive changes in efficiency, but it does not necessarily change the value propositions of companies. The main drivers for efficiency eco-innovations are internal cost reductions, as well as the improved post-sales energy performance like energy efficient home appliances. Efficient business models can contribute to larger transformative innovations but, on their own, they are less likely to inspire a radical change. New value creation approaches, on the other hand, are based on fundamental changes in the value propositions of the company that lead to the development of an entirely different set of products and/or services being offered to customers. Such approaches have demonstrable potential for substantial economic, social and environmental benefits. They go beyond efficiency logic and move towards radical alternatives that deliver value with minimum environmental impact or better from less. Clearly, such rigorously revisited business models offer fertile ground for nurturing more radical innovations. Examples of such business model innovations include shifts from product toward product-service systems linked with substantial improvements in product durability or delivering products that make other existing products redundant, such as self-cleaning paints that make cleaning detergents obsolete. New value creation approaches are typically risky and, as such, may lead to adverse economic effects in the short term, like the example mentioned above, and make some existing products and services obsolete. Ultimately, however, such radical reconfigurations are expected to bring about wider sustainability gains for society and the economy in the medium to long-term Customer Segments and Customer Relations Customers are always at the heart of the business models. The viability of ecoinnovative services and products depends ultimately on the final demand. In the context of eco-innovation, two groups of customers can be differentiated. The first group has an explicit preference for purchasing eco-innovative goods or services due to their values or their internal regulations. This group may include both public and private sector organisations that are notably large procurers, as well as the green segment of consumers. This group is also the most relevant for promoting value-adding eco-innovations, which go beyond cost saving. The second group is driven mostly by the financial cost. This group recognises the possible cost savings that eco-innovation could generate. These customers are mainly looking for improvements in efficiency and are less inclined to take risks or promote more radical solutions. 10 The distinction between cost reduction and value creation is inspired by the Blue Ocean Strategy of Kim and Mauborgne (2005). The efficiency and sufficiency logic of business models may be also related to the difference between single and double-loop learning in organisations (Argyris and Schon 1996) Business Models for Systemic Eco-innovations 37

40 3.2.3 Innovation and the Production Process Innovation and the production process in an aspect that includes three key components: key activities; key partners; and key resources. The key activities and the key partners components include the innovation process from ideas generation to the production of new goods or services. Embedding the notion of environmental value into the value propositions of a company has a direct bearing on the nature of its activities, as well as on the partners, including innovation partners and suppliers of resources with which the company engages Framework Conditions and the Systems Perspective Companies do not act in isolation and their decisions on whether to pursue radical eco-innovation depend on a number of determinants and framework conditions. Osterwaleder and Pigneur (2010) point to four groups of drivers and constraints including key trends, which involve foresight, market forces, which involve market analysis, industry forces, which involve competitive analysis, and macro-economic forces. The conceptual framework for the current study adds the perspectives of the innovation system and the social values of consumers, as both are considered to crucial dimensions in the analysis of a wider framework for eco-innovation. Framework conditions are clearly relevant to eco-innovation and changes in these conditions may require companies to rethink their business models. Regulatory pressures and market-based instruments, for example, have a direct impact on prices and markets and, as such, can directly influence companies, their business models and their propensity to eco-innovate. 3.3 Understanding the Wider Impacts of Business Models The economic sustainability of business models is assessed on the viability of their cost structure and revenue streams. The eco-innovation credentials of business models can be verified by their economic viability as well as the life-cycle wide environmental impacts of internal processes, and products and services that deliver the value proposition. The environmental impacts to be considered in this context include the use of resources such as materials, energy, water, biomass and land and the decrease in emissions of harmful substances, like CO2, per unit output. A difficulty of attribution arises when considering possible wider impacts of diffusing business models and, in particular, their potential contribution to transformative ecoinnovation. As this would require a conceptual and empirical review of entire value chains, this study remains largely illustrative. It is, nevertheless, an important starting point since the observations are rooted in empirical evidence on companies. The impacts can be assessed at the company level and include, for example, internal benefits from the reduced use of raw material as a result of material efficiency gains. More importantly, however, the effects should be understood from the perspective of the life cycle performance of products and services. This implies considering the entire value chain of a product or service. Vertically integrated companies may control several elements of a value chain, however, most value chains comprise many interlinked companies and other organisations including research institutes and public authorities. The analysis below indicates potential downstream or upstream effects of business models adapted by eco-innovative companies. For example, large-scale car sharing schemes may lead to upstream effects for distribution, design and manufacturing. Figure 7 illustrates the main phases of value flows. Firstly, the new value proposition directly influences the value creation process between the focal organisation and its downstream or customers and upstream or partners, suppliers and neighbours in the value chain. In this context, the eco-innovative practices of individual companies or networks of companies and other organisations, such as in industrial symbiosis, have a direct impact on other companies in the value chain. Direct or first order value chain 38 Business Models for Systemic Eco-innovations

41 impacts of new processes can include, for example, decreased volumes of materials purchased due to material efficiency gains or change of suppliers due to material substitution. Another example is environmentally responsible procurement practices of large retailers impacting on the extraction or production practices of their suppliers. In this context, the upstream effects in the value chain can include suppliers of raw materials reconsidering their practices as a result of changes in the focal organisation. It is important to note that the change of first-order relations and the possible reconfiguration of the value chain due to business model innovation may have significant benefits for the focal company beyond reduced cost or better quality of materials or components purchased. Value chain reconfiguration may also result in gaining a bigger market share and also new customers, as well as in acquiring new knowledge and learning in collaboration with new partners and this, in turn, may inspire the development of additional innovative products or services. Figure 7 Value Creation in the Perspective of the Value Chain and Wider Impacts Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) The first-order effects may cause further changes in the value creation process along the entire value chain, spill over into other value chains and eventually lead to changes in the value systems. Such indirect or second-order effects may be analysed both upstream and downstream in the value chain. Tracking the possible value creation effects at both the value chain and value system levels allows the wider impacts of business model changes to be discussed. The conceptual model includes the possible wider effects of eco-innovation business models. These can occur, on the one hand, in the sphere of production and service development and, on the other hand, in the sphere of the use of new products or services. Wider effects in the production system may include impacts on economic, social and environmental dimensions including making cost savings, creating new Business Models for Systemic Eco-innovations 39

42 markets, reconfiguring value chains and substituting production methods. Wider effects in the sphere of use may include impacts on various dimensions and result in the substitution of service and/or products, the reduction of the overall environmental impact, or even a change in customers behaviour. More importantly, changes in the use patterns of products and service may have a significant impact on production and make a change in existing business models inevitable. The wide diffusion of specific business models and related products and services may also result in systemic change. In the case of business models based on a network of organisations that collaborate closely, as in industrial symbiosis, the analysis of the business model can shift from the individual focal organisation to the network. In fact, the analysis of such a multiactor business model can be carried out at both the individual level and the level of the entire network. The latter approach considers the value exchange within the network as an internal process and the upstream and downstream effects as being external to the network. For example, the internal effects include the value proposition of the entire industrial district involved in industrial symbiosis toward its customers while the external includes the value implications for suppliers of the district. The wider effects are considered in a similar way as in individual cases but the sheer scale of multi-actor collaborations may make it easier to attribute to them to wider social and environmental impacts. Figure 8 outlines the process of value creation in models involving multiple actors. Figure 8 Value Creation in Multi-Actor Business Models Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) 40 Business Models for Systemic Eco-innovations

43 3.4 Public Policy for Business Models of Eco-innovation Public Policy and Business Models: the Elusive Link? Public policy, and notably regulatory frameworks and macro-economic policies, is often referred one of the general determinants of business models. The literature, however, does not deal at any great length with the specific role that the public sector can play in stimulating or guiding the value propositions underpinning business models. The reason for this is that business models are rarely considered to be a sphere for government intervention. In this context, investigating links and interdependencies between specific business models and their wider economic, social and environmental outcomes can provide an important contribution to the debate on the potential role that public policies could play in this area. Thus, following an analysis of value creation and the possible wider effects associated with specific business models, the study considers the role of policy in promoting their diffusion. This report argues that virtually all policies influencing company behaviour may have a bearing on their business models. Policies rarely address business models explicitly but there is a range of measures that provide a general framework or direction for business strategies and thus, influence components of business models. Even if these are rarely decisive in a fundamental redefinition of core value propositions, they are of relevance to the overall construction and implementation of business models. The study differentiates between policy measures that have a direct or indirect relevance for business models. The measures of direct relevance can address business models explicitly or implicitly. The former include measures offering direct support for companies based on a specific business model such as support for ESCOs and product sharing. The latter occurs when a clear link can be established between a policy and a company s business model, or more specifically between measures and specific components of the model. For example, collaborative R&D schemes may be relevant to finding key partners and providing an enabling infrastructure can influence the customer channels that are used by companies. The measures of indirect relevance include general framework conditions such as macro-economic policies and fiscal systems, as well as market-based instruments like environmental taxes that establish the general framework for the green economy An Analytical Framework for Policy Analysis Bearing in mind the above distinctions, the conceptual framework for analysing the potential role of policies in supporting business models for eco-innovation combines the policy typology of eco-innovation policy measures and the main elements of the business model. The policy typology is based on the OECD typology featuring framework conditions and market based instruments and dedicated science, technology and innovation policy (see Figure 9). Business Models for Systemic Eco-innovations 41

44 Figure 9 Policy Measures for Eco-innovation Source: OECD The analysis of policy impacts on business models is based on the distinction between those that have a direct or indirect potential impact on different components of business model, as well as those with intended or unintended effects on business models (Figure 10). This enables a simple typology of measures to be created. Figure 10 Policy Impact on Business Models for Eco-innovation Intended Unintended Direct Measures with a potentially direct impact and with an explicit aim to influence business models (e.g. supply side measures supporting ESCO or car sharing) Measures with a potentially direct impact, but without an explicit aim to influence business models (e.g. collaborative industrial R&D grants) Indirect Measures with a potentially indirect impact and with an explicit aim to influence business models (e.g. the introduction of eco-vouchers creates a demand for green products ) and can indirectly make companies revisit their value proposition. Measures with a potentially indirect impact on business models without an explicit aim to influence business models (e.g. environmental regulations imposing fees on waste generation have an indirect incentive effect on waste re-use based business models) It is important to note that the policy analysis will not be limited to analysing the relevance and potential impacts of individual policy measures, but will question the type of policy mix that is needed to support the diffusion of specific business models. The notion of policy coherence - horizontally, vertically and temporally - is particularly relevant in this context. For example, specific measures supporting renewable energy based business models will fall short of expectations if subsidies for fossil fuels are not removed, as the latter decrease the incentives for a move towards new energy sources. Similarly, supporting car-sharing schemes on a large scale cannot go hand in hand with promoting the purchasing of cars through car scrapping schemes. 42 Business Models for Systemic Eco-innovations

45 4. Case Studies of Business Models for Eco-innovation 4.1 The Methodological Approach to Analysing Case Studies Studying Business Models for Eco-innovation: A Bottom-up Approach Researchers have developed numerous alternative and radical solutions to the problems of a degrading environment, the scarcity of natural resource and unsustainable economic activity and life-styles. There are now many examples of ecoinnovative technologies, products, services, organisations and business models. While people, companies and governments may applaud these examples, they have yet to be widely diffused and disseminated. Most of the eco-innovations have a very slow journey to market or they may even simply remain as prototypes, experiments or pilot projects. This is due to a lack of understanding about how these practices might achieve economic and business success. There is also a growing recognition that in order to be economically viable many of these eco-innovative solutions require systemic or transformative changes, along with changes in consumer attitudes and a greater overall awareness on the part of the general public and the business community. However, there is still a great need for a better understanding of how to promote these transformations, and of how ecoinnovations, especially radical and transformative innovations, can achieve economic sustainability, marketability and a wider application so that they might replace existing, non-sustainable practices. Business has to bring novel products and services to market and business strategies and entrepreneurial innovativeness are important factors in the commercial success of such novel products and services. In this regard, an analysis of real-life examples of eco-innovations and business strategies associated with them can be very helpful. In contrast to the conceptual and theoretical discourse, learning through case studies can provide deeper insights into how and why eco-innovation has succeeded or failed and the nature of factors that have facilitated or hindered this process. Such a bottom-up approach can help to detect peculiarities in the business models that have been applied and the various local cultural and social factors that cannot really be explained by theoretical models. Insights from practical examples will enable a judgment to be made on both the supportiveness of the general regulatory regime and the effectiveness of specific policy instruments, and also help in drawing out policy lessons and recommendations. Thus, this report relies on empirical case studies of eco-innovations in its attempt to provide lessons for policy-makers, which will enable them to establish a supportive regulatory regime for eco-innovations, as well as for businesses and entrepreneurs. Within its project on Sustainable Manufacturing and Eco-Innovation, OECD has been collecting case studies of eco-innovation. The methodology of business case studies follows that adopted in earlier studies on open innovation and nanotechnology. The case study activities were planned as face-to-face interviews with company representatives using a questionnaire as a detailed guide for discussion. Cases were nominated by the OECD member countries, each of which subsequently nominated a country expert(s) who conducted the questionnaire survey and interviews and wrote the case studies. A total of around 100 examples of case studies were selected in consultation with delegates and nominated experts. This selection took into account a national and sectoral balance and the capacity of countries to conduct the case studies. The reporting template for the case study includes the following five sections each of which had an extended list of guiding questions: 1) General features of eco-innovation covering information on types, functions, innovativeness/novelty, target users and business model); Business Models for Systemic Eco-innovations 43

46 2) Impact and benefits including diffusion level, environmental, social and economic impact now and in the future, as well as negative impacts; 3) Innovation process covering stages of idea generation, R&D, testing, business development and commercialisation; 4) Factors that influence the innovation such as market conditions, organisation and networks, knowledge and skills, finance and resources, polices, IPR, value chains, enabling technologies and infrastructure; 5) Overall lessons including determinants, future policy support and plans. The sections below describe how the analysis of the empirical information from the cases studies is handled The Analysis of the Case Studies The methodology proposed for the analysis of the case studies will follow the conceptual framework developed in Chapter 3. The analysis will start with an overview of the eco-innovation case and focus on the business model and market solution applied in the eco-innovation. This exercise involves the following three components: 1) Imposing a typology and grouping the cases according to the business model considered in each eco-innovation case; 2) Analysis of each identified business model and the system as it is described in the proposed canvass framework; 3) Analysis of the implications of each type of business model from the value chain perspective and from the perspective of facilitating systemic change. By screening the available cases, subsections from different parts of the case studies framework, have been identified which will provide relevant information and data. To various degrees, the information in the case studies captures several aspects, such as types and novelty of business models, target users, marketing efforts, resource, enabling technologies and infrastructure. Some aspects such as value creation and proposition were not explicitly addressed in the case descriptions. However, the information about the type of business model and the eco-innovation, combined with the background knowledge of the researchers will enable a value proposition to be developed for each specific case Impact Assessment and drawing out Policy Lessons The overall approach has been to discuss and decide on the effectiveness of policy instruments using the information that has been acquired from the case studies, as well as insights from the literature review. This approach was based on the conceptual framework, presented in Chapter 3, to analyse the potential role of policies for supporting business models for eco-innovation. This combines the policy typology of eco-innovation policy measures and the main elements of the business model. The policy typology is based on the OECD typology featuring framework conditions such as macro-economic policies and scientific education, market-based instruments or getting prices right and targeted innovation and environmental policy. An initial analysis of the role of various policy instruments was carried out for each type of eco-innovation identified below. This was based on the information acquired from the case study template. The section in the case study addresses this issue by indicating the five most important policy instruments and assigning a priority using a 1-5 scale, with 1 = the most important and 5 = the least important. The list of the policy instruments covers the following categories: Market based instruments, including eco-tax, carbon tax, cap and trade schemes and removal of harmful subsidies such as fossil fuel subsidies; 44 Business Models for Systemic Eco-innovations

47 Supply side measures, which are R&D funding and support, business development funding and support, support for testing and demonstration, education and training, information brokering and advisory services; Demand side measures, including the provision of enabling infrastructures, regulations on harmful substances and activities, performance standards, labelling, certification, public procurement, consumer subsidies and pricing, support for technology transfer and standardisation of technical elements; Cross-cutting measures, such as support for networks, partnerships and matchmaking, foresight, road-mapping and scenario development The proposed Classification of Empirical Cases of Eco-innovation In the collection of empirical cases of eco-innovations, there are now 32 case studies from nine countries that cover a wide range of eco-innovations (please see Annex 2 for the full list). There are three main ways of classifying these eco-innovation cases and related business models: 1) By their functionality, including improved mobility and better use of resources; 2) By their distinctive processes, including changed customer relations, new partners or shift from goods to services; and 3) By their focal organisation, such as individual company models versus multi-actor network models. The approaches based on functionality are more common in green business models. They are normally case-based and focus on specific areas rather than offering a systematic framework (please see FORA, 2010; EPA, 2011). In relation to the classifications based on the nature of processes or products, the PSS literature suggests a typology based on the role of the product and service in the model and includes a systematic range of models starting from one based purely on the product and ending with one based purely on the service (please see Tukker, 2004). In order to reflect the diversity of cases in the sample, the study applies a pragmatic approach to the classification of the business model types. The cases were divided according to both their functional and key processes. Thus, the analysis of the cases studies resulted in the following typology of business models as shown in Figure 11. These are presented along with the relevant application areas, type of innovative process, and the potential focal organisational that is pursuing the business model. Figure 11 Classifying Business Models for Eco-innovation Type Greener product/process based models Waste regeneration systems Alternative energy-based systems Efficiency optimisation by ICT Functional sales and management services Innovative financing schemes Sustainable mobility systems Industrial symbiosis Application Area Pervasive (any function or service) Waste re-use and recovery Alternative energy generation and provision Pervasive Pervasive Pervasive Mobility Waste re-use and recovery Innovative Process Product and process innovation Product and process innovation Product and process innovation Product and process innovation Customer relations and channels (organisational and marketing innovation) Customer relations and channels (organisational and marketing innovation) Product and process innovation; Customer relations and channels Organisational innovation Focal Organisation Single or multiactor Single or multiactor Single or multiactor Single or multiactor Single or multiactor Single or multiactor Single or multiactor Multi -actor Green cities Multi-functional Multiple types of innovation Multi-actor Business Models for Systemic Eco-innovations 45

48 The business model types that were analysed are described as follows: Greener products/processes based business models provide the buyer with economic and environmental benefits during its use. This group contains a very diverse set of innovative products and processes applied in companies that have better environmental performance as, for example, they save resources and minimise emissions and waste; Waste regeneration systems, which are based on waste, re-use or recycling as new products. The business model here is focused on valuing waste, or using it as an input for producing a product to be sold in the market; Alternative energy-based systems represent a wide variety of applications, products and systems based on renewable energy deployment. Business models using these systems can be focused on sales or offer a technical service; Efficiency optimisation by ICT - ICT technologies provide a wide range of solutions for energy and resource use control, establishment of smart grids, cloud computing, as well as teleconferencing and online shopping. ICT solutions based models generally can be of two types - ICT service-based models, which include companies ensuring the monitoring of the consumption or redistribution of resources and ICT products-based models, which are basically the ICT systems or software and hardware packages that are offered and sold to customers. Once the system is installed, customers learn to use it to monitor their resource use; Functional sales and management services model is a generic model with common characteristics for all service based business models. In general, in all models there is a focus on providing the functions and benefits of the product instead of the physical product as such. The simplest models are based on delivering services using the environmentally superior materials and techniques. In the more developed models, instead of paying for the product per se a part of the transaction is a payment for the functions of the product. The service provider takes over the control of the use-phase of the product. By improving the control of use-phase of the product, the producer has an incentive to improve the output yield and to extend the life-span of the product by making the product more durable, reducing the need for spare parts, making it more energy efficient and improving the maintenance of the product. These models can also encourage the remanufacturing and re-use of the product; Innovative financing schemes represent long and medium-term investment arrangements often focused on the improvement of environmental performance, which is also linked to economic performance. The best known example is ESCO which provides energy-efficiency-related and other value-added services and assumes performance risk for its project or product. The compensation and profits are tied to energy efficiency improvements and savings in energy costs. The DBFO model is similar type of scheme. It is a contractual relationship between a customer and a private contractor that is used in construction projects that require long-term investments; New sustainable mobility systems are alternative transportation schemes with a lower environmental impact. Examples can include more efficient and cleaner public transport systems, car or bike-sharing/renting models and schemes for increasing the application of electric or bio-gas based vehicles; Industrial symbiosis - The core of industrial symbiosis is sharing the use of resources and by-products amongst industrial actors on a commercial basis through inter-firm recycling linkages. In industrial symbiosis, traditionally separate industries engage in an exchange of materials and energy through shared facilities. The waste of one company becomes another s raw material; Green neighbourhoods and cities are a complex and geographically wide system combining many eco-innovative solutions and involving a large range of 46 Business Models for Systemic Eco-innovations

49 actors. Green neighbourhoods and cities are designed with a consideration of environmental impact, inhabited by people dedicated to the minimisation of inputs of energy, water and food, and waste outputs of heat, air, water and other pollution. Such a city can feed itself with minimal reliance on the surrounding countryside, and power itself with renewable sources of energy. The crux is to create the smallest possible ecological footprint and to produce the lowest amount of pollution possible, to efficiently use land, compost used materials, recycle them or convert waste to energy. 4.2 Eco-innovation business models: a case study based analysis Greener Products and Processes based Models Introduction Greener products and processes based business models rely on the development and marketing of new, value-added products, technologies and processes that provide the buyer with economic and environmental benefit during their use. This group contains a very diverse set of innovative products, processes and technologies that have better environmental performance and, in terms of saving material resources and energy, minimise emissions, waste and other hazardous impacts. The analysis in this section is based on three cases of the product and process based eco-innovations described below. Caroma Dual-Flush Toilet The dual flash toilet is an invention of the Caroma company. This is a water efficient toilet system that disposes of human waste into the drainline system, using less water than traditional single-flush toilet systems. The two button dual-flush cistern allows the user to make the selection between half-flush or full-flush mode. The technology resulted in the development of new flush valve systems for the cistern tank, and a new generation of highly efficient toilet bowl designs. The system was introduced in 1980s and since then, has been diffused all over the world. Considering the scale of diffusion, this invention has produced enormous savings in water, thus generating a high environmental impact. The business model supporting the dual-flush toilet system is centred on a product/technology that offers customers water savings in the use phase, which are then translated into financial savings. In comparison to the business as usual case, based on the single-flush toilet system, the business model for the dual-flush toilet offers considerable value both for the company and its customers. Potential savings of water resources and money is the main value proposed to customers in this model. Customers are attracted largely by the fact that throughout the life-time of the system it will achieve these savings. In addition, its technological simplicity, affordability and compatibility with the existing infrastructure add to its advantages and extend the value offered to the customer. The company or producer has captured value by reaching a wider market. Time has shown that the dual-flush system has become very successful, both in the original Australian and then in the global market. It has been widely welcomed by all types of customers including individuals, companies and public institutions. Many customers have chosen this system not only for economic but increasingly, for ecological reasons, which points to the development of more specific customer groups with a high environmental awareness. The dual-flush toilet has also become a part of the eco-standards applied in sustainable houses and offices, which, in turn, has increased the market for this system. CSIRO Powder Coating, This product is a powder coating that does not involve toxic solvents and uses a vacuum shed that catches any powder coating that has been over-sprayed. This results in zero-waste during the application. The process is both more efficient and less environmentally harmful than traditional solvent-based coating technologies. The business model supporting this technology offers a number of values both for buyers Business Models for Systemic Eco-innovations 47

50 and for the company selling the technology. Significant annual sales and cost savings are expected to result from its application. The innovative powder coating is estimated to be some 20-30% cheaper than the traditional wet paint technology which will result in savings in the Australian automotive industry alone of some $100m per annum. This technology can be applied in the automotive, aerospace, furniture, plastic and wood product industries. This has ensured a relatively large market outreach, which is a significant addition to the business values/benefits captured by the company. Also, there is currently no competition to this process and, as a result, further interest and demand is expected. The process has the same durability and performance as traditional powder coating technologies that are used mainly on inherently conductive or metallic products, which naturally facilitates electrostatic coating. Vanadium Redox Battery The vanadium redox battery is a type of rechargeable flow battery with improved performance. It can offer almost unlimited capacity by using larger and larger storage tanks. It can also be left completely discharged for long periods of time with no ill effects. The solutions used in the battery have an indefinite life and this provides low maintenance costs for the battery and ensures a long life-cycle. This innovation has not been introduced to the market and is currently being trialled in Australia, Japan, Canada, USA, Europe and China. Overall, it is seen to have a great business potential, particularly in light of the increasing demand for large power storage applications, such as helping to average out the production of variable sources of power such as wind or solar energy. In addition, energy storage has been identified as an essential component of the future Smart Grid. The unique characteristics of vanadium redox batteries make them useful in applications in Smart Grids where the batteries must be stored for long periods of time with little maintenance. This has led to their adoption in large-scale, grid-connected applications such as load-levelling, back-up power for factories and energy storage for large wind farms. In the context of the business model, the company can expect to work for, or be contracted by, the developers of the renewable energy sources, municipalities, private and pubic organisations that will be promoting Smart Grid based system of energy supply Business Model System Analysis Main actors All product and process-based models discussed in this chapter have a focal company that is the developer and seller of a new product or technology and the customers who are the consumers of the products or service (please see Figure 11). Depending on the circumstances, customers are individuals, other companies or public organisations. In almost every case, there is a group of partners who are involved in the value chain. They supply materials, take part in product development, testing, and marketing and in other activities in all segment of the value chain. Customer relations and channels Customers group can also be seen as a market niche. Some greener products are oriented towards mass use, as in the case of the dual-flush toilet, which can be used both by private customers, as well as by companies and organisations that are willing to improve their water use performance. Other products are designed for a specific group of customers, or for a more narrow market niche. For example, the new battery that can be used only in a specific energy sectors, while the powder coating technology is used in automotive, aerospace, furniture, plastic and wood product industries. This ensures a wider market and larger clientele groups. In the product and process based business model, the most common channel linking producers with customers is sales. Longer-term relationships are rare in this type of 48 Business Models for Systemic Eco-innovations

51 model. However, a relationship might be maintained if the product/technology is sold along with a technical service and/or maintenance guarantee. Figure 12 Greener Products and Processes based Model Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Resources Every product requires a range of resources for the processes of development, manufacturing and marketing. This includes material resources, such as metals and water, and knowledge resources embedded in peoples expertise, as well as in instruction manuals and blueprints. Activities in a new business model can stimulate a reconfiguration of resource streams or involve a switch to new resources. However, there may not be any major implications as was the case for the dual-flush toilet which generally did not require any alterations to the established set of resources. Value Creation Several types of values can be captured by the companies involved in a business based on the design and marketing of greener products. Values captured by the focal companies traditionally include economic gains or profits achieved through the expansion of the market, demand for the product and the competitiveness of the product/process in comparison to its alternatives. These are largely determined by the attractiveness of the product, in other words by the values that the product offers to consumers. Such a feedback system of value translations concerns the dynamism and interdependence of the values created under a single model. To put it simply, this business model brings economic values to the focal company, by offering values to customers. Business Models for Systemic Eco-innovations 49

52 The largest value for customers is associated with the potential economic savings due to avoidance of losses and more efficient use of resources, which are water, paint and energy in the cases that are cited above. Both the users and the focal organisation find a green branding value in going for greener products. It creates a better image for the organisation, or even helps it to improve its environmental management standards Understanding the Impact across the Value Chain Environmental impact created on the upstream value chain can vary and depend on reconfigured manufacturing processes and upgrades to new cleaner technologies and standards. Often the producer puts extra requirements on changing or improving the environmental or economic features of the input materials. In the downstream part of the value chain or the use phase, positive environmental impact can be associated with the use of a cleaner product, its improved environmental performance during use and after-life disposal as is the case for less toxic batteries and paint. In many cases, positive environmental impact can be linked to reducing the extraction and use of natural resources. Social impacts created by the model can be associated with the diffusion of knowledge and expertise about specific (green) technologies and their potential and benefits. These impacts can, in the long run, strengthen the overall knowledge base of the area and push forward the evolution of the innovation system based around the relevant technologies. Economic impact on a downstream part of value chain largely replicates the economic values created for users via a more efficient use of resources. On the production side, this model can potentially ensure economic gains for the entire network of partners and suppliers. In the long-term perspective, this can translate into economically viable greener clusters or industries and contribute to greening the national economy The Contributions to Radical/Systemic Change The implications of the product based eco-innovations for systemic shift can vary from case to case. Ideally, they should influence changes associated with the entire product cycle. For example, switching to more sustainable methods of material sourcing and imposing such methods on the suppliers can promote a shift from linear production thinking towards closed-loop schemes. Also, sustainable lifestyles and consumer attitudes are important components of systemic change. However, there is no straightforward conclusion on how a product based innovation can change consumers behaviour towards embracing a more sustainable lifestyle. This change can be inspired by the product s design, which could require the user to handle a product in a particular, more efficient way. Associated services can also help to make adjustments to a different, more sustainable style of product use. Increasing awareness of the environmental footprints of certain products can also help to make individuals change their attitudes towards a more sustainable choice The Role of Policy in promoting Eco-innovations The large diversity in new greener products, materials and processes also requires a large variety of policy support measures. The case studies show that the most important role is played by direct support measures like the funding of R&D, testing and demonstration and business development. Other high impact instruments are performance standards, certification and labelling. The growing popularity of green labels and of introducing environmental management standards into companies has created new opportunities for the development of products with improved environmental performance. Demand promoting measures like public procurement and consumer subsidies can play a significant role in expanding markets for green products, as well as in improving the economic viability of many of these products. Regulatory instruments that control pollution levels and environmental taxes can also provide an important basis for the development of eco-innovative products. 50 Business Models for Systemic Eco-innovations

53 Other notable measures that support product, material and process based ecoinnovations are support networks, collaboration amongst developers and the promotion of training and education activities Concluding Remarks When put in the context of a business model, new, green products and processes provide the buyer with economic benefits including savings and a better quality or higher value product and also with environmental benefits such a resource saving and longer life-time of the product. In other words, these are the products and processes that draw more values from fewer resources. As the examples have shown, this grouping can contain a very diverse set of greener products, processes and technologies. At the core of the business model, there is a new product, process, or technology, associated with the values it offers to customers. The models rely on diverse approaches to how producer-consumer relationships are maintained and organised, which can range from simple sales channels, through more inclusive schemes including technical assistance services, to collaborative innovative networks. This category of business models has considerable potential to attract new green/resource-conscious customers including individuals, companies and public organisations. At the same time, it can impose systemic change by, for example, influencing or changing resource supply methods or shifting from a linear production mode towards closed-loop industrial schemes Waste Regeneration Systems Introduction With the increasing scarcity of the natural resources, as well as the growing understanding of environmental concerns, waste is increasingly being seen as a resource. This realisation of the value of waste has been investigated and proven by many examples. The business perspective is reflected in using waste as an input for producing products to be sold on the market. The case studies offer a number of examples of eco-innovations based on enhancing the value of waste and the business models that support their economical viability. Enhancing the Value of Alcoa Bauxite Residue A bauxite residue commonly known as red sand is a by-product of alumina production. Alcoa currently produces around 3-4million tonne per annum of this red sand residue. Up until now, Alcoa Western Australia had stockpiled the red sand at their plant. The proposed eco-innovation will recycle red sand, and use it in a wide variety of applications. In comparison to the former situation in which this by-product was deposited as waste, the new method provides a number of benefits for Alcoa, including the provision of a new product that can replace virgin sand materials in a wide variety of applications such as cement formulations, road bases, landfill and top soil dressing. By introducing this innovation, Alcoa has managed to reconfigure the value chain by turning waste into a product, assigning an economic value to it and capturing this value by selling it to other industries, as well as by reducing the company s resource inflows and the associate costs. In addition, the recycling allows Alcoa to significantly reduce their stockpiling-related costs and assists it in the long-term management of its production waste. New revenue streams and cost savings are the central economic value capture of the business model adopted by Alcoa. Along with the environmental benefits associated with this model, it offers branding value the image of being an environmentally responsible company. Business Models for Systemic Eco-innovations 51

54 Humolea using the Residues of Olive Processing to produce high-quality Soil Conditioner All the treatment processes for olives produce some liquid and solid wastes, which are toxic. This invention includes a novel method of turning olive residues into a highquality soil conditioner. The soil conditioner is produced exclusively from plants, and it has proved to be ideal for the cultivation of many products such as citrus fruits, vines, aromatic herbs and asparagus. Traditional olive waste treatment methods such as aerobic/anaerobic biological treatment, incineration or gasification, do not generate any recycled products and have not been technically efficient or cost effective. Humolea s business model associated with the innovation reconfigures the value of the waste by processing it and upgrading it to a valuable product. It proposes a new value chain associated with the new product and the business model enables the value from it to be captured. It also offers a number of other attractive values. Notably, it allows farmers to switch easily to biological cultivation and enter the bio-products market, which offers a promising economical profit perspective, as the price of biological olive oil is 1.5 times higher than the price of the olive oil deriving from chemical cultivation. Ecoera Biochar The process, which is the foundation of Ecoera s business, starts with by-products from agriculture that do not have traditional areas of use. These residues are usually landfilled and are therefore a potential source of methane emissions. Using these residues as raw material and blending them according to specific proprietary formulas, Ecoera manufactures Bio-agropellets which are combusted in a lowoxygen environment in a process called pyrolysis. This produces agricultural biochar or Bioagrochar, which, when assimilated in soils, removes carbon, and during pyrolysis produces syn-gas, which can be used for heat or bio-fuel production. The business model that evolved around this innovation offers a new type of climate compensation service, so called Biochar Carbon Sequestration. The system enables a bridge to be made between agricultural soil carbon and the Carbon Accounting Systems of companies. On the farm, the biochar creates a provisioning for the soil ecosystem service. Also, it lowers the methane emissions from crop residues by turning them into biochar carbon. It has been shown that the biochar from Ecoera has increased the soil s nitrogen-holding capacity. Currently this voluntary climate compensation is sold to emitters at a higher rate. The rate will go down as the system is scaled up. In the end and with the right policies, farmers should be able to be paid to store carbon in their soil. This would be a fair carbon tax. Ecoera has its own equipment to produce biochar and is also using subcontractors to manufacture biochar-producing equipment Business Model System Analysis Main Actors A company dealing with waste processing and marketing is the focal actor in this model. Often this is a company/developer of the waste recycling technology. It may be an intermediary between the suppliers of waste to be processed, or in other words a partner in the upstream of the value chain, and the consumers of the product based on the recycled waste, or customers in the downstream of the value chain. There can be some variations in the configuration of this small network of actors. In case of Humolea, it may be assumed that some of the waste suppliers, in this case the olive farmers, can also be customers for the soil conditioner. While in case of the Alcoa bauxite residue, the waste supplier also serves as the focal company and thus, it has no partners in the upstream part of the value chain. For Ecoera, the customers are the farmers who use the services of the company. Other partners are the technology providers and suppliers of energy, water and other inputs that are necessary for the processing activities. 52 Business Models for Systemic Eco-innovations

55 Customer Segments, Relations and Channels The models based on enhancing the value of waste normally target a narrow group of customers. These are other companies that will use secondary products in their activities such as agro-companies for organic soil conditioner and construction companies in case of bauxite residues. The channels to reach these customers are direct or indirect such as via intermediary sales. Additional services are possibly involved, especially in case of bio-gas supply. The long-term relationships are also often established due to the need to maintain a constant flow of the processed product like the sand and bio-gas. Key Activities Building the base of the business model and the technological process often starts with R&D, technology testing and optimisation activities. Although radically new innovative activities might not be included, these activities often contain novel elements. The development of the Humolea technology required a serious R&D process. The development of this innovation was started in 1989 by the innovator, Professor Apostolos Vlyssides, at the Laboratory of Organic and Chemical Technology in the National Technical University of Athens. The research aimed to develop a technically and economically effective method for the treatment of olive mill wastewater. Testing was carried out in three rounds of pilot projects over a period of six years. These were geared to optimising the technology and increasing the efficiency. In case of Alcoa, some research has been carried out on the re-usability and applicability of the red sand in various industries. Day-to-day activities include running the technological/production process, maintaining the logistics of inputs and products, and sales and marketing. Here there is a large choice of ways in which these activities can be organised and a decision can be made on whether innovative elements should be introduced and the final arrangements vary considerably from one case to another. Resources The key resources for the company processing the waste are the waste materials, other input materials like water, chemicals, energy, technology/machinery, infrastructure for logistics and storage and financial resources/investment. The cost of these resources is an important factor, as it influences the viability of the business model. The most important resource of the company is the knowledge or expertise in the specific areas of biochemical treatment of organic waste (Humolea), the industrial application of red sand (Alcoa), and biochar technology (Ecoera). Value Creation In general, the business model based on enhancing the value of waste first of all creates the values for a company that gets involved in the business. The value captured by a company is associated with acquiring economic gains from the normally cheap input of waste, producing and selling new products and accessing new markets and customers. The business cases were based on high quality organic fertiliser from the olive waste, seeds and leaves (Humolea), selling and reusing the red sand from aluminium ore (Alcoa), and the biochar products combined with carbon storage/ecosystem services (Ecoera). All three companies entered new markets with their product. One additional value was that their business activities gave them a green reputation and this is increasingly becoming a competitive advantage. Often positive values are also offered to customers. In the case studies, these customers are the construction companies using the secondary sand and the farmers who need organic fertiliser. Access to diversified products with improved quality represents some value for them. In the case of farmers, the use of organic fertiliser raises the quality of their agricultural products and allows them to enter the bioproducts market. Additionally, customers can achieve extra satisfaction from Business Models for Systemic Eco-innovations 53

56 becoming greener consumers. The Ecoera model offers a unique value for the customer/farmers using biochar as they should be able to be paid to store carbon in their soils. Some evident values can be generated for the partners, particularly the suppliers of the waste. The value created is associated with selling their waste, getting new customers and decreasing the contamination of their sites. Large savings can be also made by avoiding or reducing waste handling costs. Figure 13 Waste Regeneration Model System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Understanding the Impact across the Value Chain On the upstream side of the value chain, this model ensures substantial economic gains for producers in both the short- and long-term. These resulted from selling the waste or a secondary product of waste. This factor is a backbone of the model and ensures its long-lasting economic impact and viability. In the downstream part of the value chain, economic benefits associated with product use might not be immediate. Using organic fertiliser enables farmers to move into organic agriculture, where products have a higher value on the market in comparison to the non-bio alternatives. In this case, positive economic impact is created. The ecosystem service involved in Ecoera example continues as long as there is carbon emission compensation and a trading system in place. The model clearly generates wider positive environmental benefits across the value chain. On the upstream side, it is associated with reduction or prevention of hazards from unprocessed waste, which can include soil and water contamination, air pollution, odours and carbon emissions. On the users or downstream side, positive environmental impacts can be expected due to the use of cleaner products, as well as through reducing the extraction and use of natural resources. For example by using bio-gas instead of fossil fuel, organic soil conditioner instead of chemical fertiliser and processed sand instead of virgin sand. 54 Business Models for Systemic Eco-innovations

57 The new economic activities around waste processing and selling have the potential to generate new jobs through the scaling up and diffusion of the projects. On the downstream side of the value chain, it is possible to envisage positive impacts on health such as those for the farmers who avoid having to deal with chemical fertilisers thanks to the organic alternative. Another social impact can be associated with the diffusion of knowledge and expertise about these technologies, their potential and benefits. In the long run, this can strengthen the overall knowledge base in these areas and push forward the evolution of the innovation system around these technologies. Better knowledge, experience and more advanced technologies can further influence the overall framework conditions by, for example, imposing policy targets for waste recovery or institutionalising the activities on waste processing The Contribution to Radical/Systemic Change Overall, in the waste regeneration models the positive value and impact can be generated across several components of the value chain, including upstream activities where costs are decreased due to reducing the extraction of natural resources and impacts are associated with use, as well as production and sales processes. The role of this business model in creating larger scale systemic change might not be very great, but this impact can depend on: In the long run, the diffusion of knowledge and expertise about these technologies and their potential and benefits can strengthen the overall knowledge base in these areas and push forward the evolution of the innovation system around these technologies; Better knowledge, experience and more advanced technologies can further influence the overall framework conditions by, for example, imposing policy targets for waste recovery or institutionalising the activities on waste processing. However, due to the relatively insignificant role of users, massive changes in consumers behaviour and major progress on social values are not to be expected. Nevertheless, the diffusion of cleaner projects and related information may generally increase the awareness of various stakeholders and of the population at large. This, in turn, might have a positive impact on their attitudes and further on the overall framework conditions The Role of Policy in promoting Eco-innovations The promotion of waste regeneration based innovations can be facilitated by a number of policy measures. R&D funding support was indicated as being the most important measure in all the case studies. Often the implementation of such innovations depends on funding from various national and EU funding programmes or support from internal funds as was the case for the Bauxite residues. Innovations addressing waste problem are often pushed by regulatory measures controlling harmful emissions and activities, as well as by environmental taxes. Processing organic waste can result in dramatic reductions in, or a complete absence of, methane and carbon emissions. Therefore, the emission trading schemes can serve as an additional incentive instrument to capture value by reducing greenhouse gas emissions and generating emission credits, which can be sold on the carbon market. The removal of subsidies for fossil fuel can generate indirect support for the products of waste processing by increasing their competitiveness on the market. This applies specifically to such alternative energy resources as bio-gas and bio-fuels. Support for technology transfer from the R&D stage to market appears to be important for those new technologies that target waste regeneration. Business Models for Systemic Eco-innovations 55

58 The products of waste regeneration can receive additional support from green labels and certificates, as in cases of the organic soil conditioner and the products from olive waste. Green or bio-labelling can pave the way to new markets for such products Concluding Remarks The cases presented in this section demonstrate the variety of opportunities that waste regeneration related innovations can offer. This includes the diversity of business models adopted to support such innovations, ranging from simple sales to ecosystem service and carbon sequestration schemes. When put in the context of the business models, these technologies can offer a wide range of economic, environmental and social values both for producers and the customers. The core function of these models is turning waste into valuable products which presents attractive economic potential for the companies dealing with waste. The models rely on considerable R&D activity on waste processing technologies to ensure competitiveness and superiority in the competitive market of technology developers. In this respect, green labels and certificate schemes can provide additional advantages and open the way to new markets for these regenerated products. The role of this business model in creating the larger scale systemic change can vary depending on its scale and activities. In particular, the diffusion of knowledge and expertise can have a substantial influence on the evolution of the innovation system around these technologies, and further developments could trigger more ambitious policy targets for waste recovery or the institutionalisation of activities on waste processing Functional Sales and Management Services Introduction This functional sales and management services model is a generic model with common characteristics for all service based business models. Generally, for all models there is a focus on providing the functions and benefits of the product instead of the actual physical product. The simplest models are based on delivering services using more environmentally superior materials and techniques. In the more developed models, instead of paying for the product per se, a part of the transaction is a payment for the functions of the product and the service provider takes control of the use-phase of the product. By improving the control of the use-phase of the product, there is an incentive for producer to improve the output yield and to extend the life-span of the product. This can be through making the product more durable, making it more energy efficient, reducing the need for spare parts or improving the maintenance of the product. These models can encourage the re-manufacturing and re-use of the product (FORA, 2010). The well-known examples identified in the literature are chemical management models (CMS) and integrated pest management (IPM). Another relevant example that appeared in the collection of case studies was Qlean non-chemical cleaning Qlean Cleaning with Ultra-pure Water The Qlean cleaning process is based on the use of ultra-pure water. The founders of Qlean, Peter and Petra Hammarstedt, discovered that the cleaning of surfaces can be done with cold water, low pressure and without detergents, when ultra-pure water is used. This reduces the environmental pressures from detergents, noise and energy use and makes it possible to clean more difficult surfaces like plaster and wood. It is also cheaper because no detergents and less energy are used and the execution time, including the drying process, is shorter. The water dissolves algae, mould and dirt and works equally well on grease and oil. 56 Business Models for Systemic Eco-innovations

59 Three groups of services are provided: 1) Surface cleaning of buildings and boats (Qlean surface); 2) Cleaning of utility constructions like transformers and surveillance cameras (Qlean construction); 3) Cleaning in industrial processes (Qlean industry). In the business cases Qlean surface and Qlean construction, Qlean provides the cleaning service, not just the ultra-pure water. This water cannot be stored for longer than a day, as otherwise its oxygen and nitrogen gases re-dissolve into the water. In the business case Qlean industry, Qlean provides the cleaning equipment. Further insights into the novelty of the functional sales business model can be acquired by comparing the Qlean case to its business as usual counterpart. Usually, the cleaning of surfaces and equipment is done by using chemicals and hot water at high pressure and this produces environmental pressures and leaves residues of chemicals on the cleaned items and their surroundings. With the Qlean method, value is re-configured at two locations in the value chain as the cost of certain inputs are reduced, namely chemicals and high-pressure equipment, whereas the client gains value by eliminating residues. With the functional sales business model, Qlean has managed to capture this value and share it with their customers, making the innovation beneficial for both Business Model System Analysis Main actors The focal actor is the supplier of the service. When the service is really interacting with the production or business process of the customer, as in the case of Qlean industry and to a lesser extent Qlean construction, cooperation or co-development with the client and possibly with other equipment suppliers, is necessary. In this case, there is no real upstream in the value chain, as the only resources used are water and energy and its technology is simple. However, external experts from the University of Linköping were used to verify the technology and this helped to counteract the more traditional ideas that were predominant in the cleaning sector. Customer Segments, Relations and Channels The service model has very broad applications and can be used for all kinds of customer groups. Offering a service instead of a product reduces the risk for the client and also releases the client from any attendant management responsibilities. The use of services may be especially attractive to clients that are not large enough businesses to make the purchase of equipment and the hiring of skilled staff an attractive proposition. Though the model is broad, the customer segments depend, of course, on the services offered. In the case of Qlean, the first clients were the owners of buildings. When it was discovered that oil also dissolved in the ultra-pure water, new groups of customers were targeted, and the services were developed was in cooperation with these clients. The channels to reach customers in functional or service sales based business models are predominantly direct. In the case of Qlean, many demonstration sessions were held at in the clients buildings or places of business. The nature of the relationships with clients depends on the services offered and their frequency. For Qlean, the relationship with industrial clients is far more intense and long-term than with the owners of buildings who only use their service on a sporadic basis. Resources The key resource of a company in the functional sales model is process knowledge of a certain technology. Secondly, service providers often possess specialist equipment which is needed for the service. The Qlean company possesses process knowledge on how to produce ultra-pure water and have the appropriate equipment. Positive client Business Models for Systemic Eco-innovations 57

60 references are also very important, as is shown by the rapid growth after the difficult initial years. Financial resources still limit additional growth. Value creation The main added value is the economic value created by the company delivering the service for the clients of the company. The clients get a cheaper and/or better solution for their problem, which in this case is a cleaning problem, and transfer part of their savings to the provider of the service solution. Figure 14 Functional Sales (Cleaning Service) Based Model System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Understanding the Impacts across the Value Chain Service industries generally have a small upstream impact as they are less capitalintensive. For Qlean, there is no real upstream to the value chain. However, the Qlean process did spark additional research in Sweden on the basic physical properties of water. When considering the downstream effect of the functional sales business model, distinctions can be made between economic, environmental and social impacts. Depending on the type of service, there are often relatively substantial downstream impacts, given the fact that it is necessary to create value for clients. In the Qlean case, economic gains are reduced costs for cleaning and reduced costs for repainting, product rejection or scaffolding, as such costs are not necessary when using the Qlean technology and services. In this case, the environmental impact is reduced pollution, because no detergents are used, and reduced noise due to the low-pressure model. However, there is no clear social impact for the Qlean. 58 Business Models for Systemic Eco-innovations

61 The Contribution to Radical /Systemic change. Service models can have a large impact because they provide integrated solutions for customers, which reduce risk and also release the client from any attendant management responsibilities. Functional sales can have a major impact because only a small number of actors need to change their practices to create this impact. The dissemination of new innovations can happen more quickly in functional sales business models. The role of this business model in creating larger scale systemic changes may be considerable but in the end, the scale of change is largely dependent on the service that is being provided The Role of Policy in promoting Eco-innovations For Qlean chemical cleaning technology, the most important policy role was played by the supply side measures that supported the testing, demonstration and business development, as well as the formation of networks and partnerships. Regulatory measures controlling the use of harmful substances were also very important is assisting the emergence of this very specific innovative technology. The fact that this technology has a negligible impact on the environment is the biggest advantage that Qlean has over most of the traditional chemical cleaning technologies. Public procurement can play a big role in diffusing these types of innovation, considering that public organisations constantly make use of service providers. Another useful policy instrument in service industries relates to certification and performance standards. These can help eco-innovations using the functional sales business model, as the eco-innovations can make a credible distinction between themselves and other more conventional competitors Concluding Remarks Innovative new functional sales or services provide value for clients by saving money or providing a higher quality compared to conventional providers. By making use of the process knowledge of service providers, these companies can perform certain tasks more efficiently and effectively in economic, social or environmental terms than the client itself, thereby creating value. In the business model of the functional sale provider, consumer relationships are often very important especially when the service is required on a frequent basis. In the case of Qlean, an innovative green way of cleaning, the company keeps in close touch with industrial clients, who require their services on a continuous basis. Functional sales business models have the opportunity to make a large impact on ecoinnovation, as a small number of actors can bring about system-wide changes Alternative Energy Based Systems Introduction Renewable energy sources have received much attention in the last 25 years. Their large-scale introduction began with hydropower in the 1950s and 1960s and has really taken off since 1990 because high oil prices and CO2 policies have created favourable market conditions. In this section, five case studies are presented that represent different renewable energy sources. Most have business models based either on producing renewable energy and selling it in competition with hydrocarbon based energy, or on selling products, and particularly the equipment, that produces renewable energy. Brite Hellas PanePower TM Solar Windows Brite Hellas is a start-up from Greece that was only established 2009 and currently has 10 employees. It intends to introduce solar windows onto the market in These windows have an energy demand reduction effect, as they reduce the use of air conditioning and, at the same time, they produce electricity by means of a solid Business Models for Systemic Eco-innovations 59

62 electrolyte TiO2 nano-coating. Thus, they could become an important feature in zeroenergy buildings. Brite Hellas has developed a cheap process for their mass production. The business model is based on selling a product that reduces energy consumption and produces electricity, which makes it economically viable to buy. Traditionally, buildings have coloured panes and air-conditioners for climate control and may have separate solar panels for electricity production. When using solar windows, the energy needs for AC are reduced and electricity is produced by means of integrated photovoltaic (PV) cells. This should be both better and cheaper than other options. Torresol Energy Investments, Commercial Scale CSP Torresol Energy Investments S.A. is the owner of GEMASOLAR, a full-scale Concentrated Solar Power (CSP) plant in Spain, in which four new technologies have been introduced: Software (SENSOL) for managing and operating solar plants; A new collector design; A new energy storage system based on molten salts; and A new heliostat system. Based on demonstration in this full-scale plant, Torresol will promote technological development and construct, operate and provide maintenance for large CSP plants all over the world. The business model seems not to be fixed, as it will depend on the actual local circumstances such as selling an energy production plant, selling the service of energy production, or selling energy. This is in line with general business model developments in supplying public utility services. By reconfiguring the value chain according to the BOO principle (build, own, operate) Torresol has been able to create a full scale CSP for further commercialisation and in this way has been able to make further developments in CSP. Solray Energy Limited, Super Critical Water Reactor Solray Energy applies super critical water technology to the production of commodity chemicals using different types of bio-mass, but mainly bio-waste, as feedstock. Conversion occurs through a combination of heat, pressure, catalysts and timing and it uses super critical water that is heated to a temperature in excess of 300 o C, with pressure above 20 Mpa. Subsequent to the reactor stage, a solvent is used to extract the commodity chemical, which is bio-crude oil, from the sludge residue. At present, the development is at pre-commercial testing point. The potential target users are wide, and include organisations that are harvesting algae via wastewater treatment or as a method of cleaning up eutrophic lakes. Target users also include facilities that have an abundance of sawdust or lignin, such as paper mills, saw mills, forestry industries and energy crops producers. Solray wants to use IPR to enter into concurrent co-development arrangements to get to the market. In this way, the technology will be spread and organic wastes can be transferred into a crude oil type of product by means of a super critical water reactor, instead of being land-filled, burnt or digested. Preseco Oy, Bio-carbon Preseco Oy is a Finnish environmental technology company that solves challenges related to bio-waste. Preseco delivers facilities and equipment for water and waste water treatment as well as bio-waste refining. With partners, they try to deliver integrated solutions. A development they have initiated is bio-carbon technology. Preseco s carboniser plants are designed to produce high-quality bio-carbon from a variety of organic materials by means of pyrolysis burning technology. Bio-carbon is bio-fuel with a superior energy value and very low emissions that can be used in applications where coal is used at present. This is an advantage for the Bio-carbon producers and sellers, as well as for the users. Preseco has developed and tested the technology and is commercialising the technology by means of licensing. Other 60 Business Models for Systemic Eco-innovations

63 companies can then use the pyrolysis technology to transfer organic wastes into a coallike product with high energy content and use it as a resource or bio-fuel, instead of land-filling, burning or digesting the waste. Waste Solutions, Cigar Biogas Reactor Waste Solutions started as a New Zealand government research institute, but is now a division of CPG New Zealand, a daughter of Australian multinational engineering firm Downer EDI. Over 35 years, Waste Solutions has researched, developed and implemented a number of biotechnology solutions to harness and optimise the energy potential from industrial, agricultural and food processing wastes. The Cigar Biogas Reactor is a treatment and energy recovery solution or process for agricultural, food processing, industrial or municipal sources of wastewater. The Cigar Biogas Reactor system is a low capital costs option in countries or regions where land area is not at a premium and it is also exhibiting low operating costs. In general, Waste Solutions builds the water treatment installation that is then owned and operated by the client. This client will retrieve the investment costs by using/selling the energy produced and, when applicable, by reducing the costs of water treatment Business Model System Analysis Main Actors In these of these five cases, processes have been developed for generating sustainable energy. Focal actors in each case have been the inventors as part of, or in combination with, engineering companies that actually translate the inventions into a commercial product. In cases of Brite Hellas solar windows and Waste Solutions cigar water treatment, the idea came from a university or research institute. In most cases, apart from Preseco Oy, a specific entity was set up to develop and market the product, often because external funding was needed to demonstrate the technology. This funding was supplied by VC suppliers for Brite Hellas, a foreign company in case of Torresol CSP and an angel investor funded Sunray. Preseco Oy is searching for co-developers and for external funding. Government subsidies have played a role but this has been considered as being limited compared to other inputs. Another important type of actor seems to be the provider of the test site. For example, CIEMAT, the Spanish Research Centre for Energy and Environmental Technologies, made its existing test facilities available for Torresol, the local council provided testing facilities for Solray s waste water treatment plant and the first application of Waste Solutions in Thailand was also very important. The more complex the technology the more important technological partners are especially when internal technological capabilities are not sufficiently well-developed. Sometimes partners are also needed to open up marketing channels, such as a glass manufacturer that was used by Brite Hellas. The core of the business-model in all the five cases is that a new process, which is cheaper than the existing processes, is delivered for energy supply in houses, water treatment, waste treatment or electricity production. Where the prime product is energy-related the competition is with hydrocarbon based resources or with other renewable energy sources. In these cases, important determining factors are oil prices and government mechanisms for promoting renewable energies. In the other cases, where the prime goal is treating waste or waste water, these factors are also of importance because energy is a side product from these primary processes but the main source competition is from other water or waste treatment processes. Customer Segments, Relations and Channels The five cases have different kinds of customers but all are professional customers. They include builders and property developers for Brite Hellas, energy companies and regional governments for Torresol and waste water and organic waste owners for Solray, Waste Solutions and Preseco Oy. Consumers do not play a role in these business models. Business Models for Systemic Eco-innovations 61

64 The channels for approaching customers are therefore also different, and various business-models are used. Selling of an installation and related services is a common business-model but especially with the larger and/or more risky investments other business-models like Build Own Operate Transfer (BOOT) are used. Depending on the business-model, the length of the relationship may vary from quite short-term to very long-term. Key Activities The activities are pretty straight forward from a business-model perspective - develop a technology, demonstrate it and also demonstrate that is better or cheaper and at least as reliable as the alternatives and the sell it. Figure 15 Renewable Energy System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Resources Important resources are the innovative ideas and the money for the development and demonstration processes. Access to testing facilities is also important. Value creation The ultimate value in the business model is created by producing energy and reducing external energy needs. The value for the focal player is either derived from selling the equipment, selling the service of energy production, which is sometimes done in combination with other services like water purification, or in selling the energy. The way the value is harvested by the focal company depends on the circumstances. Social value is reflected in local jobs, in less dependence on external energy resources and in environmental effects including reduced CO2 emissions, clean water, processed waste and odour reduction. 62 Business Models for Systemic Eco-innovations

65 Understanding the Impact across the Value Chain The economic model for these innovations is that manufacturers provide a process to customers. Customers can buy this process as a product and operate it themselves as a service or they can buy the resulting energy. The foundation of this model is economic gain based on the reduction of energy costs or cheaper waste or waste water processing. Profitability depends on the price of energy, including subsidies for sustainable energy/co2 reduction. However, some of the cases are profitable without the need to resort to subsidies. An example of this is the cigar water treatment case, where payback time can arrive within 12 to 36 months. Upstream additional economic effects like turnover and profit can be obtained by the suppliers of the process manufacturer. Environmental effects are obtained downstream. The main effects are the production of sustainable energy and the reduction of related CO2 emission. Also some of the cases use classical environmental technologies to deliver clean water or processed waste but the additional return obtained from the production of energy makes them more viable. Social effects upstream are limited to the use of local suppliers or builders. Downstream social effects lie in local employment and more independent energy supply The Contribution to Radical/Systemic Change Sustainable energy is the final solution for CO2 emission problems and the rising prices of fossil fuel based energy sources. In these five cases, various business-models are used, either for the production of energy or for delivering a solution to an environmental problem whilst also producing renewable energy. Particularly in the latter situation, the solution offered should be cheaper than the existing solutions. This is important, but as the CSP example shows, without support this may not be enough to replace fossil fuels. However all these technologies create additional options for replacing fossil fuels with non-fossil energy sources, which may lead to the radical/systemic change of energy production without CO2 emissions. In the case of CSP, this type of demonstration plant, which is not viable without some kind of subsidy/fiscal support, helps to improve the technology so that next generation of CSP can be developed that will produce electricity, at the same or at lower costs, than fossil fuel based electricity The Role of policy in promoting Eco-innovations Many policy instruments can be important for the promotion of renewable energy technologies that address the technology supply and/or the energy demand. The five cases appear to largely benefit from supply side measures including direct funding support for R&D, testing and demonstration, as well as for commercialisation. Offering physical opportunities for testing, such as test and demonstration sites have been of importance in the cases of Torresol and Solray. Regulations on pollution control also seem to play a relatively important role. Market based instruments from the demand side can provide incentives for renewable energy projects. A carbon trade scheme appears to have been the priority factor in implementing bio-gas projects, and environmental taxes pushed forward solar window technology development. Fiscal support for green energy consumers has been of importance to the introduction of CSP. Standards and green labelling appear to create incentives for some renewable energy based systems. Public procurement was shown to be helpful in diffusing Presceco technologies that incorporate small-scale waste water treatment and bio-gas production systems. Such systems are very attractive to small municipalities and districts. Information brokerage and advisory services were key instruments in the other waste water to biogas solution developed by Solray, in New Zealand. Other notable policy Business Models for Systemic Eco-innovations 63

66 instruments that promote renewable energy based systems include technical standards, support for technology transfer, partnership and networking, education and training and foresight and scenario building Concluding Remarks When put into the context of a business model, alternative energy systems have two kinds of customers. For the technology suppliers, which are the focal player in the cases outlined above, the primary customers are the buyers of the technology systems that produce energy. Secondary customers are the consumers who buy the energy produced. Because of technological uncertainties and the risk aversion of technology buyers, the increasing tendency is not to buy technology, but an energy production service, or even energy itself. In this way, the risk of technology failure and the hassle of having to operate a technical facility, which is not the core-business, are shifted to the technology supplier. The economic advantage for these customers is therefore not only in the source of cheap energy, but also in the limited risk to their energy supply and/or to outsourcing a production process that is possibly too complex. Economic value may be increased with revenues from tradable CO2 emission rights, when applicable. Another economic advantage is using a treatment process for waste or water in such a way that valuable energy is produced and treatment costs are lowered. Environmental effects are related to economic effects and consist mainly of reductions in the use of hydrocarbon resources. Where the energy production process is coupled with waste or water treatment, the environmental advantages are also in these areas. Consumers who buy energy get sustainable energy instead of hydrocarbon energy, which may, in the end, be cheaper Efficiency optimisation by ICT Introduction Information and communication technology (ICT) solutions based models can generally be of two types: ICT service-based models, which include companies monitoring of the consumption or redistribution of resources and ICT products-based models, which are basically the ICT systems or software and hardware packages that are offered and sold to customers. Once the system is installed, customers learn how to use it to monitor their resource use themselves. Two examples from the collection of case studies are presented in this section. Intelen Social Energy Network Intelen provides real-time energy metering, analysis of consumption results and integration with social networks. It also provides real-time social demand response services to raise the awareness of the end-user/consumer about efficiency. The innovation is a complete service for the customer, incorporating specific Web 2.0 process and back-end intelligence. The means used are Web 2.0 technology and mobile and social nets directed to the end-user or customer. The innovation allows the company to bring a rather unique ICT technology to the mass market. In comparison with the traditional energy metering that uses a once a month or once a year measuring of the energy consumption, this new tool is a userfriendly and a smart way of monitoring energy consumption on a day-to-day basis. Intelen has introducing a new business model at two levels: a) Combining energy efficiency with social incentives through social networks; 64 Business Models for Systemic Eco-innovations

67 b) Alternative revenue streams, for example, by establishing green deals like for the end-user or customers of large clients such as supermarkets. Carta Sense s Smart Wireless Network Communication Carta Sense is a wireless sensing system to track the temperature and relative humidity of products and their environments. The system comprises wireless sensors, a gateway and a communication server. The business model has a very specific market orientation. It focuses on cold chain management solutions. The system spans the supply chain by monitoring the product conditions, from the raw materials through their processing and to their transportation to their final destinations. Carta Sense based this business model on the fact that the market had failed to offer an effective solution to food quality monitoring in large retail chains. Normally, such quality checks are based on a primitive visual monitoring of food quality, which is ineffective and can result in the loss of products. By introducing the new system, Carta Sense captured the value from the unexploited market by introducing its affordable and simple online monitoring system TaKaDu s Water Infrastructure Monitoring Water utility companies experience large losses of water resources due to inefficiencies in various parts of the water supply network. TaKaDu pioneered the use of algorithmic data analysis for the online monitoring of water networks. In other word, in its business model TaKaDu offers a service to the utility company and becomes its "eyes and ears" in its water network. It does this by analysing raw network data such as flow, pressure and quality readings from various metering points within the network, and then transforms that data into useful information for its clients. The core of the company s business model is a simple online system for the daily monitoring of water consumption at various points of the water supply network, using convenient and intelligent software tools, and timely interventions. The traditional method of monitoring carried out by water companies tended to be inefficient and non-transparent and it did not ensure a timely reaction to accidents or water leakages in the network. TaKaDu has managed to offer a very efficient solution and to capture the value from the otherwise unexploited market Business Model System Analysis Main Actors The focal actor in this model is the normally the ICT company that is also the author of the ICT system or product/service being offered to the customer. The partners associated with the upstream value chain could be other ICT companies, research institutes or hardware developers that cooperate to develop specific-purpose ICT systems. The customers in the downstream of the value chain can be private customers in case of Intelen, businesses such as food retail companies in case of Carta Sense, or the energy or water utility companies for TaKaDu. Customer Relations and Channels It should be noted that there might often be close cooperation between the developer and the customers during the development and testing stage. By requesting specifically designed software, customers sometimes open the door to a greater degree of involvement. The companies providing ICT services, such as the monitoring of energy or water use maintain links with their customers through personal contacts or online services. In product-based models, the ICT company reaches customers through traditional sales channels, either direct sales or online sales, and maintain their post-sales services if regulated by the contract. Key Activities Activities to build the foundations of the business model start with software and hardware development activities, and these are followed by testing and adjustment, Business Models for Systemic Eco-innovations 65

68 which often involve the potential users. The cases of TaKaDu s water monitoring system and Carta Sense s system for food supply chain are good examples of this. The Carta Sense idea came up after thorough research and after discussions with customers to try to understand their unmet needs in the market. The idea was to improve some of the existing solutions to specially fit the cold chain needs and provide a prompt solution to these needs (Carta Sense case study). In the service-oriented models, ICT companies provide permanent maintenance support for the system, such as for the Intelen social system network. Activities on product-based models may include post-sale guarantee maintenance and upgrades of software. Figure 16 ICT Based Models System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Resources The most important resource of the focal company is its knowledge or expertise in the software development, as well as its understanding of the specificities of the industry and users for which the the ICT system is being developed. For example, the case study mentions that Carta Sense s ability to come up with this unique solution is due to the founders' expertise in RF technology and the familiarity with the cold chain needs. Other necessary resources are ICT hardware and infrastructure and the financial investment to fund the initial development activities. Value Creation In ICT-based business models, value creation at the level of focal company is often strictly economic, which may extend to larger business potential associated with expanding markets for specific ICT products and services. The additional value that the company gets is a green image. Similar values can be expected for companies 66 Business Models for Systemic Eco-innovations

69 that are partners in the development of eco-innovative ICT systems. Value for customers offered under the eco-innovative ICT-based business models includes economic savings due to reductions in losses and a more efficient use of resources. For example, the customers of TaKaDu s water monitoring system have demonstrated returns on investment of hundreds of percent that have been achieved on a monthly basis. In the case of Intelen, every energy consumer can save up to 35-40% of electricity consumption and this leads to substantial economic savings. Other values offered to customers may include convenience, time efficiency and simplicity in the use of the system. The green image that can be acquired by the user can be an additional non-economic value that is becoming more appreciated Understanding the Impact across the Value Chain In the short-term, the partners in the upstream part of the value chain might not experience a large economic impact. However in the long run, there are good market prospects for greener ICT products and services. The expansion of this market can potentially be translated into the creation of new jobs. On the use side or downstream part of value chain, the economic impact largely goes hand in hand with energy and water efficiencies and reduced ecological footprints. This impact is clearly positive and reflects the accumulated saving achieved by resources/energy saving, efficiencies and prevention of loss. The environmental impact is largely concentrated on the use phase. It is achieved through the reduced use of water and energy resources, which also eliminates the ecological footprints associated with the supply, and also post-use processing, of these resources. Considering the relative ease of adoption and diffusion of ICT systems, the potential environmental impact can be relatively high. However, an overall, positive environmental impact is not expected in the upstream part of value chain. In fact, in the long run, there is a risk of creating a negative impact, associated with the energy and material intensity of the ICT industry The Contribution to Radical/Systemic Change The role of the ICT technologies in creating larger scale systemic change can vary. However overall it is assumed that ICT has the potential to bring about transformative changes that will make a large environmental impact. However, this impact depends on the level of complexity and penetration of ICT technologies into the various aspects of life such as production, logistics, consumption and transportation. It is also recognised that ICT is a major enabling technology for many other eco-innovations. It is difficult to judge how much change it can engender in consumers behaviour, as this largely depends on the context of the specific application. Nevertheless, it is increasingly evident that ICT will play a very important role in all aspects of life and in all industrial sectors. ICT will inevitably be part of most of the systemic ecoinnovations in the future The Role of Policy in promoting Eco-innovations Based on the observations drawn from the case studies, it is possible to see that the policy measures that promote the funding of development, testing/demonstration and business set up play an important role in advancing ICT solutions based ecoinnovations. Environmental regulation and taxes can also be strong push factors for the development of ICT solutions in the field of energy and water resource management. The provision of enabling technology and infrastructure is shown to be another priority for ICT based solutions. There is a major role for Internet and wireless technologies, as many new ICT systems use of the Internet based platforms such as the social networks in the case of Intelen, and the online monitoring system in TaKadDu. Often the ICT solutions benefit from the involvement in the development stage of potential, or future, users. For example, cooperation with water utility companies in the TaKaDu project ensured that the new water monitoring system correctly and Business Models for Systemic Eco-innovations 67

70 efficiently addressed the problems and needs of these companies. Similarly, in Carta Sense the role of support measures promoting interaction and partnership were demonstrably of great importance Concluding remarks Information and communication technologies have become pervasive technologies that have been successfully used in improving practices in various industries and sectors. They are widely used in monitoring air and water pollution, improving disaster warning and relief, improving the efficiency of the transportation, goods and services sectors, as well as in harnessing social networking for transformative change. Today the potential for ICT companies in the green market is higher than ever. In the context of promoting eco-innovative business models, ICT technologies offer a wide range of tools for energy and resource use control, establishing smart grids and cloud computing, as well as promoting teleconferencing and online shopping. ICT based eco-innovations and business models can create positive value and impact across several components of the value chain. These include business opportunities and new revenue streams for ICT companies and a large variety of benefits for users, including individuals, companies and organisations. A significant environmental and economic impact/value can be generated in the use phase by enabling a more efficient use of resources, such as water and energy. It is expected that the ICT applications will be an important part of most of the systemic eco-innovations to come Innovative Financing Schemes: ESCO Introduction The diffusion of eco-innovations, even when the innovation may be economically attractive, is often limited because of the up-front investment that is needed. This is often considered to be too high and when combining with the uncertainties that the eco-innovation implies for the possible users, the diffusion often does not proceed. Thus, in order to promote more diffusion, the eco-innovation risk must be reduced and financing provided. ESCO (Energy Service Company) is one example that appeared in the case studies of an innovative method of financing eco-innovations in the reduction of energy consumption. Danfoss/ESCO solutions An ESCO solution is a commercial service in which the provider analyses the clients production processes and routines. This is with the aim of reducing the clients use of energy and the next steps are to design and implement an energy efficient solution. The client is guaranteed energy savings by the ESCO provider. There is no financial risk for the client and the risk remains completely with the ESCO provider. The provider is paid according to performance, and the payment is proportional to the resulting energy savings. If the guaranteed savings are not achieved, the provider compensates the client accordingly. The ESCO concept was developed in the USA in the aftermath of the energy crises of the 1970s, and it is predominantly used for reducing energy use in buildings. Danfoss Solutions, an energy saving service provider, primarily targets industrial sectors such as the food and beverage markets. With an innovative approach, that not only focuses on technological solutions but also includes people engagement, Danfoss Solutions is normally able to reduce utility costs by 10-20% and obtain significant CO2 emission reductions and reductions in water consumption. 68 Business Models for Systemic Eco-innovations

71 Business model system analysis Main Actors The focal actor in this model is ESCO, the Energy Service Company, that is approaching the customers, developing the energy savings approach, providing financing and achieving the savings in practice. In this case, ESCO is a subsidiary of a large supplier of industrial machinery. The customers are the energy users and, in this case, often industries from the food and beverage sector that want to reduce their utility costs and/or improve their energy performance. ESCO may provide the technical solution by itself or may also involve technology providers and local installers. Other possible partners may be financial institutions that provide the funding needed for the investments. In this case however, Danfoss Solutions is part of large international industrial group with adequate internal financing, so they do not need external financing. Customer Relations and Channels The core of the business model is the development of a complete solution that entails no risks for the client. Although this model can, in theory, be applied very broadly it requires an intimate knowledge of the sector of application and the energy consuming processes within that sector. ESCO therefore targets specific sectors, like Danfoss Solutions that primarily targets the food and beverage industry. The channels to reach these customers are generally direct and according to Danfoss Solutions, marketing is a challenge as sales are tedious and require multicompetency sales such as technical, commercial and consultancy directed at different levels in the clients organisations. The model implies long term relationships, as the payment for ESCO is based on the client s actual utility costs savings. Figure 17 ESCO Innovative Financing Model System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Business Models for Systemic Eco-innovations 69

72 Key Activities The base of the business model is to be able to provide integrated solutions without any financial risk for the clients. The risk remains completely with ESCO, and ESCO must therefore be certain that the solutions lead to the expected reductions in energy costs. The technologies used are therefore proven. The innovation is not in the technology, but in the business model. Key activities are technological analysis, providing financial resources and implementing the solution with external partners. It took Danfoss Solutions three to four years to reach proof-of-concept for the ESCO solutions in the chosen sector, one to two years of selling, and another three years before attaining a positive result. The technical and financial knowledge was available in-house at Danfoss Solutions but external advice was sought to develop a feasible performance contract. Resources The key resources of ESCO are knowledge of energy reduction solutions and their costs and revenues, financial resources to provide the investments, a network of technology suppliers, a track record of successful projects and access to customers. In general, the obstacles to reducing the energy consumption are the uncertainties and the lack of awareness of the customers. All of the key resources are used to overcome these uncertainties. Value Creation Value in the business model is created by the reduction of the utility costs of customers, and by removing the investment risk in energy saving measures, as all risk is taken by the ESCO. ESCO is paid from the cost reduction and, when performing well, will make a profit from this. There is additional value to technology suppliers and local installers. Also, when ESCO uses external sources of finance, it needs to pay the interest on the loan Understanding the Impact across the Value Chain The ESCO business model ensures substantial economic gains based on the reduction of energy consumption through the use of proven technologies. ESCO and the client agree acceptable pay back periods. In general, these pay-back periods for the investments are three years. The business model is very much client oriented. ESCO is paid in proportion to clients savings. Technology suppliers also receive economic benefits, when their products/services are used by ESCO. The main environmental effects are reductions in energy and water consumption and related CO2 emissions. Other environmental effects may also be present. Danfoss Solutions claim noise reduction because machinery is idling less. The holistic approach in the case study produces a common focus that includes energy ambassadors and increased team spirit with awareness and motivation campaigns. In addition, the use of local installers is now being promoted by Danfoss Solutions and this strengthens the local economic structure. The positive effects on innovation are very limited because risk reduction is an important feature of the concept and innovation generally increases risks The Contribution to Radical/Systemic Change The role of this business model in creating larger scale systemic change is small, because innovation is not promoted. However the potential for incremental changes is quite large and costs of many energy savings are lower than the costs for alternatives like sustainable energy The Role of Policy in promoting Eco-innovations The major incentives for the ESCO model appear to be the market based policy instruments like environmental or carbon taxes and emission trading schemes. This 70 Business Models for Systemic Eco-innovations

73 can be explained by ESCO s focus on controlling energy consumption and the associated carbon emissions. The proof of the ESCO concept often needs direct support for the testing and demonstration of the activities planned under the energy service contracts. Performance standards, labelling and certification all seem to be important factors that help to persuade potential customers to use ESCO services. Education and training support also appears to play an important role in popularising, and creating a demand for, ESCO services Concluding Remarks The ESCO model is a very attractive way of removing barriers to the financing of developments that might not otherwise be undertaken because of a lack of awareness of the opportunities for economic gain, or because of the perceived risks. It may be an easy way of obtaining a large effect without the need for systemic changes. Although it does not promote innovation, it may also be an effective method of spreading new technology once it has been proven. The model makes energy use a core business process, instead of just a utility issue, which it is nowadays in many non energy intensive industries Sustainable Mobility Introduction Sustainable mobility innovations are often underpinned by substantially re-visited business models. They represent a shift in the overall organisation of mobility services and introduce new infrastructure and vehicles. The sharing of cars or bicycles is one of the most widely diffused eco-innovation business models in the area of urban mobility. Product sharing or shared use is about creating systems, in which users do not own the goods, but have flexible access to them when and where they need them. It is often considered a type of product-service systems (Mont 2004). Examples of the new sustainable mobility systems covered in the case studies are the SkyCab transportation system in Sweden and Better Place in Israel. The SkyCab Transportation System SkyCab is an intelligent, automatic, on-demand public transit system that supplements other forms of transportation in urban areas. The business model of SkyCab is to offer a safe, fast and reliable public transportation that helps to replace the need for, and the use of, cars. The target users are passengers in urban areas requiring relatively long trips to the city s hot spots. The aim of the SkyCab is to supplement buses, local trains and the underground with a convenient, non-polluting and cost effective new innovative form of public transport. A SkyCab vehicle runs on elevated guide ways four to five meters above ground level. It can accommodate up to four passengers on each individual journey. The system operates day and night in any weather, even snow and ice. It has no timetable restrictions and transports the passengers to their selected station without any intermediate stops. In Sweden, SkyCab is available in twelve different cities. Better Place Better Place delivers a network and services that promote the use of electric vehicles. The drivers of each electric car have access to a network of charging spots, battery switching stations and systems that optimise the driving experience and minimise the environmental impact and cost. What distinguishes the business model of Better Place is that it separates the ownership of the car from the ownership of the battery, which remains the property of service provider. Better Place also offers a user-friendly in-car IT information system which provides the driver with information on the car s energy performance and on the nearest charging stations. Business Models for Systemic Eco-innovations 71

74 Business Model System Analysis Main actors Focal actors in the sustainable mobility business models are the companies offering a service that coordinates a network of partners and suppliers. In the case studies, these are the Better Place and SkyCab companies, which have engaged in a number of strategic alliances. Main partners depend on the outreach of the company promoting the scheme. Producing companies need partners who provide support in changing customer relations and channels. In mobility-oriented schemes, the key partners typically include the public sector, at both national and local levels, the financial sector, the utilities and the producers, which for Better Place are electric car and battery manufacturers. The limited economic rental costs in the short-term together with the unquestionable social and environmental benefits make the public sector a natural partner in these large scale sharing schemes. This results in the emergence of various public-private partnerships and the case studies of Better Place and SkyCab confirm the key role of such partnerships. Customer Segments, Relations and Channels As the margins are typically lower than in sales-based business models, mobility has to be targeted at a market of a sufficient scale. The sustainable mobility based business models target mass markets in large and medium sized cities or wider geographical areas if there is a sufficiently large client group and the necessary infrastructure. Better Place, for example, has an ambitious global outreach targeting entire national markets. It has operations in Israel, Denmark and Australia and currently targeting North America and China Japan. SkyCab is willing to share its vision with any interested city. Given the large segments targeted, the relationships with customers are based on automated services, combined with personal assistance. The customer channels are typically Internet for registration and checking the availability of products, easily accessible unmanned local stations for car parking and speedy battery charging stations, as well as service centres offering face-to-face contact. Figure 18 Business Model of Better Place Source: Hansen (2011) Better Place. An OECD case study in a PowerPoint presentation 72 Business Models for Systemic Eco-innovations

75 Key Activities Mobility models are based on products, but at the core are non-technological innovations in service provision, which are notably related to information management, coordination, maintenance and repair. The classical car-sharing, bikesharing or tool-sharing schemes require only minor product adaptations and the product shared remains essentially the same. Increasingly, however, the transport-sharing schemes become testing grounds or frameworks to disseminate or introduce radically innovative products and solutions. In the case of SkyCab, a new vehicle and new infrastructure has been designed from scratch and this required a substantial R&D investment and the construction of the infrastructure. The Better Place scheme promotes the development of the electric car infrastructure comprising quick charging stations and battery switching. While the scheme has not substantially altered the vehicle, it required R&D on the batteries, switching stations, charging spots and in-car IT services. Key Resources Key resources for the mobility models include coordination and planning capacity, supported by ICT and logistic systems that support the management and servicing of the fleet of vehicles or of batteries. An infrastructure is also necessary to support the vehicles, as are the technical teams that are responsible for servicing and maintaining the products and the network. Figure 19 Sustainable Mobility: Transport-sharing Model System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Value Creation The main value proposition in the mobility business models is offering customers flexible access to mobility services. The two cases are based on different value propositions. Better Place also offers customers flexibility and a high quality service - Business Models for Systemic Eco-innovations 73

76 they do not need to be concerned about the battery as there are many local charging stations. There is also an economic value in the prospect of cheaper electric vehicles as well as environmental value in driving cleaner vehicles. While the batteries remain the property of the service provider, the cars belong to the customers. SkyCab also offers personalised mobility services, but its model is based on sharing a vehicle with other customers. The design of the system guarantees minimal waiting times and shorter trip times than the alternative means of city transportation. The model does not involve ownership of the vehicles, which remain the property of the service provider. The economic value for the customer is mainly related to savings in the pay-per-use system. The model is also based on other values including social and environmental benefits. Safety benefits are especially important as the in SkyCab system there is a minimum risk of accidents. There is also a symbolic value associated with the use of shared transport that is being perceived as being green and procommunity. The economic value captured by companies or other bodies promoting sustainable mobility models is based on gaining profits from service delivery, including leasing products such as batteries and service charges. There may also be a strategic advantage in terms of market intelligence, as companies anticipate new trends in delivering mobility services. This allows them to anticipate future demand and consumer behaviour, as well as organisational, product and technological needs Understanding the Impact across the Value Chain The diffusion of such models may have significant implications for existing value chains. Sustainable mobility schemes are directed at large numbers of customers and they also involve a large number of partners from different sectors. Thus, if successful, they can be expected to impact on value chains. The immediate upstream effects on value chains in both the cases were the establishing of close collaborative relationships with different partners from different sectors in developing the necessary components for the schemes, such as a new vehicle, battery, software and infrastructure. This established new value networks, as there are substantial benefits in creating new markets and revenue streams from sales of new products, services, new knowledge and learning. The immediate downstream value chain effects may also be significant. The new clients of the mobility solutions may act as multipliers and promote a greater use of these new services, which in the longer-term could lead to substantial shifts in consumer behaviour and social values, such as attitudes towards ownership in the case of product sharing The Contribution to Radical/Systemic Change The impacts of new business models on existing production systems and mobility patterns may be substantial if they reach a critical mass of users. New ways of delivering mobility services may impact on the car producing industry. In the case of the Better Place type of model, the possible impact lies in strengthening the move towards electric vehicles and the related adaptation of value chains in automotive industry in the longer-term. It could also strengthen new trans-sectoral alliances such as between automotive and battery producers, mobility providers and energy utilities. One of the strengths of the Better Place model is its scalability and high degree of transferability. There is, however, a risk associated with this model as in many respects it is based on the traditional model of owning a car. The environmental and social case for the wider dissemination of the electric vehicle mobility business model could be reinforced if it encompassed the possibility of sharing the vehicles or considered expanding their scope to public transportation. However, the latter would lead to a decreased demand for cars and an inevitable decrease in the manufacturing of personal vehicles. In this case, the car industry would need to become the mobility industry and re-focus on delivering mobility services by producing vehicles suitable for a shared use as well as 74 Business Models for Systemic Eco-innovations

77 servicing existing fleets. This would involve an increased production of components and spare parts and an increased role for services. Both cases are explicitly focused on delivering environmental benefits. Better Place bases its model on concerns about oil dependence and envisages substantial environmental benefits from electric mobility. The environmental benefits of widely applied, sustainable solutions may be very high, but there is also a risk of rebound. In the case of electric vehicles, there is a general environmental concern with materials like lithium that are used in the batteries and also about the economic and environmental cost of recycling batteries. The proponents of Better Place are very aware of these issues and envisage the use of the most advanced environmentally friendly solutions. Nevertheless, there is a risk of becoming over dependent on material availability and being hit by rising material prices. The SkyCab model offers clear social and environmental benefits in congested cities, as it is designed to be a substitute for less effective means of transport. The wider impacts of SkyCab or similar solutions are less likely to occur in the short-term due to the high infrastructure costs and the lower scalability. This model is inherently linked to investments in infrastructure and the need for space to install its elevated guide ways in already congested cities restricts its applications. The model requires substantial investment in the planning and design phase and requires very strong public sector involvement, which can speed up the necessary investment The Role of Policy in promoting Eco-innovations Both case studies reported a key role for public policy and the importance of collaborating with the public sector. For Better Place, government leadership in promoting electric mobility through its strategies and support measures was one of the key drivers in its success. Creating favourable strategic frameworks and supporting the creation of links between partners were even more important than direct support for R&D or innovation investment. However, priorities may different depending on the country concerned. The SkyCab model recognised the role of the favourable framework that was emerging, as well as the benefits of public R&D funding for feasibility studies, proof of concept and demonstration in the early stages of its development. It may soon also receive further public funding to launch a pilot system. The direct support has been more important in the case of SkyCab due to its novelty and relatively high cost of entry, as large demonstrators are needed. Large-scale, sustainable mobility initiatives require the involvement of a wide network of public and private actors. In the absence of such networks, policy measures supporting the setting up of these partnerships are of great importance. Public procurement and market-based policy measures may also be considered to support the market deployment of mobility initiatives beyond the demonstration phase. It is also important to bear in mind that sustainable mobility projects have large transformative potential that can help to reverse current unsustainable mobility patterns. Therefore promoting such projects requires the building of shared visions of the future systems and the design of roadmaps towards the realisation of these visions. The role of public sector as a partner in championing such processes is crucial Concluding remarks Sustainable mobility business models have considerable potential to become drivers of radical eco-innovation. Sustainable mobility eco-innovations can be a very powerful incentive for changing consumers behaviour. The two case studies and other wellknown examples such as bike-sharing, offer a clear value proposition that has the potential to create economic, social and environmental value. The models are scalable, even if entry costs differ depending on the case. Due to its inherently large customer target group, the eco-innovative mobility business models face relatively high entry costs, as they usually require the adaptation of both Business Models for Systemic Eco-innovations 75

78 products and infrastructure. Therefore, the role of public policies is to develop favourable framework conditions as well as targeted investments in R&D and innovation in case of radical projects that have a longer distance to market Industrial Symbiosis Introduction Industrial symbiosis (IS) is defined as engaging traditionally separate industries in a collective approach to competitive advantage involving physical exchange of materials, energy, water, and by-products. The keys to industrial symbiosis are collaboration and the synergistic possibilities offered by geographic proximity (Chertow, 2007). Mirata and Emtairah (2005) list the following benefits that have been produced by successful cases of industrial synthesis: Environmental benefits - improved resource use efficiencies, reduced use of nonrenewable resources and reduced pollutant emissions; Economic benefits - reductions in the resource inputs costs in production, reductions in waste management costs and from the generation of additional income due to higher values of by-product and waste streams; Business benefits - improved relationships with external parties, development of a green image, new products and new markets; and Social benefits - new employment and raising the quality of existing jobs by creating a cleaner, safer, natural and working environment. The most well-known example of industrial symbiosis is Kalundborg, in Denmark, where the first exchanges took place in the 1970s. Interestingly, industrial symbiosis is not only applied in industry, but can also have applications in the city system, such as in Jyvaskyla in Finland. This report focuses on one of the major industrial symbiosis projects, Kwinana Regional Synergies Project in Australia. The Kwinana Industrial Area (KIA) is one of the most well studied cases of industrial symbiosis (please see also Chertow 2007). The project is one of the largest industrial symbiosis projects in the world and assisted in the development of over 47 synergies, which were 32 by-product synergies and 15 utility synergies. KIA provides eco-efficient solutions for the management of ongoing waste, energy and water needs with both environmental and financial benefits. This eco-innovation is a service that was provided to help facilitate a more efficient exchange of water, waste products and energy within the area. The introduction of industrial symbiosis stimulated a change from an uncoordinated industrial district where by-products were treated as waste to a connected system in which by-products and excess energy are exchanged and reused. The Kwinana Cogeneration Plant (116 MW capacity) is located on land of the BP Kwinana oil refinery, and produces all process steam for the refinery, and generates electricity for BP as well as the grid. The cogeneration plant is fired with natural gas supplemented with excess refinery gas. The cogeneration plant built in 1996 took the place of the BP steam boilers, which were in need of replacement at the time. Total benefit has been estimated as a reduction of about 170,000 tonnes of carbon dioxide emissions per annum. This synergy allowed BP to decommission its old inefficient boilers, estimated to have saved the refinery in the vicinity of A$ 15 million in capital expenditure while ensuring a cost competitive reliable source of steam and electricity for their refinery. Moreover the refinery has achieved greater process efficiencies as a result of the greater and more flexible availability of high-pressure steam from the cogeneration facility. The cogeneration plant discharges its wastewater to BP s wastewater treatment facility. Source: van Beers Business Models for Systemic Eco-innovations

79 Business model system analysis Main Actors The cooperation was initiated by the Kwinana Industries Council (KIC) together with Centre of Excellence in Cleaner Production (CECP) and both were instrumental in planning, managing and delivering the success of the eco-innovation. Since the 1990s, KIC has been responsible for waste and energy management, the industrial hazards programme, and air and water monitoring and protection with the specific aim of reducing the impact of KIA on the sensitive marine environment of the adjacent Cockburn Sound. KIC was the key to developing contacts and building the network with the participants in the industrial park. The companies in KIA have been involved in the project and a committee structure, the Eco-efficiency Committee, ensures continuous feedback from these companies. There are some 50 members of KIC of which 43 were participants in the industrial symbiosis programme. CECP was the main knowledge partner, which provided the industrial symbiosis expertise to perform the assessment and feasibility study and it provides continuous technical support for the implementation of the project. Importantly, the KIC has been in contact with many other players outside the industrial area, including government, regulators, energy providers and the Water Corporation, as well as representatives of the local community. Value Proposition and the Value Chain The value proposition has incorporated economic, social and environmental aspects from the outset. The economic value was to be captured by both members of the network or the business actors, as well as the community because better jobs were created and more businesses were attracted to the region. Developing an early ecoinnovation business case was particularly challenging and required detailed assessments and research before a sufficiently strong business model could be proposed. The initial assessments of the return on investment and of the level of risk were too weak to convince investors but in the end, these initial difficulties were overcome. According to the case study, member companies have achieved individual cost efficiencies, but overall estimates are not available. Environmental and social values were at the core of the model. The local community was concerned about air and water emissions into Cockburn Sound, waste management within the KIA, job security for those employed at the Industrial Park, and the tenure of the Industrial Park. Social pressure was considered to be a key driver of the eco-innovation and resulted in the inclusion of wider social and environmental value right from the outset. Key Activities The key activities in setting up the initiative included preparing a detailed feasibility assessment and building up and animating a network of companies. The industrial symbiosis research was a long and arduous process requiring significant time and energy to be invested by the many companies in KIA who took part in the innovation development. KIC set up the Eco-efficiency Committee to help to facilitate the project. According to the OECD case study, without KIC assisting the individual companies to see the value of financially committing to the project (onerous data collection and continual management to ensure the delivery of the synergy) the project may never have gotten off the ground. In addition, training programmes were implemented, such as water auditing and the Eco-efficiency Committee organised workshops to communicate the values of the industrial symbiosis to interested companies in the district. Activities involved organising meetings between companies that might develop a synergy, supporting the development of the required infrastructure, overseeing the existing synergies, as well as communicating with relevant partners and Business Models for Systemic Eco-innovations 77

80 stakeholders from outside the district. Please see Figure 20 for a simplified illustration of Kwinana business model. Resources The key resources include both tangible and intangible assets. First of all, the prerequisite of any industrial symbiosis project is the existence of companies with byproducts of value to other companies. This tangible asset is solid or liquid by-products or simply waste or excess energy, often in the form of heat or steam. Another tangible resource is infrastructure such as pipes that enable the exchange of by-products. In this case, the Water Corporation built the Kwinana Water Reclamation Plant (KWRP), which provided a significant synergy for many of the companies. The building of KWRP also required significant investment in water infrastructure to make the necessary connection to this plant. Figure 20 Kwinana Business Model (left) and Enabling Mechanisms (right) Source: Rosano (2011) The benefits of Industrial Symbiosis: The Kwinana experience in a PowerPoint presentation Other key prerequisites were knowledge and specific expertise. The initiative was based on industrial symbiosis principles and methodologies provided through a partnership with the Centre of Excellence in Cleaner Production at Curtin University. EMS systems were used as part of the overall industrial symbiosis assessment. CECP had many years of industrial ecology research experience that could be used to facilitate the innovation and to determine the potential synergies and symbiosis activities that were worth developing. Another key intangible resource was a coordination capacity in a form of a dedicated and committed coordinating team in the Eco-Efficiency Committee. This team developed the innovation from the assessment, though convincing the Industrial Park members of the benefits of the innovation, to ratifying the sustainability benefits. Customer Segments, Relations and Channels In the case of this industrial symbiosis, there are three levels at which the customer segments, relations and channels can be analysed. Firstly, all the member companies are customers and suppliers within the network, as they offer or receive by-products as raw materials. Secondly, all the companies in the network can be considered customers of KIC in the sense that it offers them the opportunity to participate in the symbiosis. Thirdly, the local community as well as potential external investors or new entrants to KIA can be considered as customers in the sense that the project offers them value. KIC is explicit about having to manage the interface between the industrial park and the local community. It was aware of the increasing environmental standards in terms of air and water quality that were being demanded by the community and made the move to anticipate these more exacting standards. 78 Business Models for Systemic Eco-innovations

81 Understanding the Impact across the Value Chain The key economic impacts include accumulated operational cost savings and the creation of additional revenue streams. Furthermore, the park is seen to be a more attractive location for business, both by the existing companies and by the new entrants. As a result of this innovation, it is expected that more companies will, in the longer-term, be able to operate in the park, and it is argued that more new companies will be attracted to the area because of the potential for synergies. Some will come because they can offer synergies to other companies such as waste heat gathering technologies owned by boutique companies that can be bolted on to an existing plant. Significant benefits for the community include a better quality of life as a result of the cleaner Industrial Park, a cleaner Cockburn Sound that serves as the regional swimming beach and job security for those working in the KIA, as the improved environmental performance of the park is believed to be one of the factors that is securing a longer tenure for KIA. The district has achieved greater resource efficiency through the reduced use of water and energy. There is also evidence of considerable environmental improvement being achieved as a result of this innovation. The achievements include air quality improvements with NOx and SOx emissions being reduced, water quality improvements in the water discharged into Cockburn Sound and a variety of efficiencies created when by-products or waste streams are used and shared within the KIA. Figure 21 Industrial Symbiosis Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) Business Models for Systemic Eco-innovations 79

82 The Contribution to Radical/Systemic Change The model of industrial symbiosis is a clear example of a business model that can be adapted in different countries, regions or cities. Its network, which is built on the symbiotic idea, can be the main contribution to wider systemic change in how industries operate, source resources, deal with waste and share environmental responsibilities. The concept is simple and easy to understand for both business and government. There is an enormous potential benefit in savings from creating synergies both on the scale of major cities and industrial districts, as in KIA, and on a smaller scale. The accumulated economic benefits and environmental improvements achieved thanks to symbiosis can be significant The Role of Policy in promoting Eco-innovation The role of policy and its regulatory framework is very pronounced in the case of industrial symbiosis. The support was instrumental in kick-starting the initiative as it provided a grant for conducting the assessment and feasibility study, which were crucial in developing an early business case. The main funding was obtained through a Co-operative Research Centre (CRC) Grant from the Federal Government. The total CRC funding amounted to $500,000 over seven years. This was matched by a smaller commitment from industry that came from companies as well and from KIC. Just under 10% of KIC's annual budget was committed to the Eco-efficiency Committee work, and most of this went to CSRP (Centre for Sustainable Resource Processing) projects. Also regulatory pressure from the Department of Environment and Conservation (DEC) and the Water and Rivers Commission was considered as a key factor. The air emission quality and water discharge quality standards helped to encourage the adoption of the innovation. In addition, improved water security, reduced energy costs, lower waste generation and improved waste storage all added to the benefits of the innovation. However, regulations were also considered barriers that prevent or delay the implementation of synergies, e.g. existing water and energy utility regulations and environmental regulations requiring intensive approval procedures for by-product reuse (van Beers et al 2007) Concluding Remarks One of the strongest advantages of the industrial symbiosis model is the simplicity of its basic value proposition - someone s waste is someone else s resource. There are existing cases of industrial symbiosis, which are well established and there is a wealth of evidence on their economic, environmental and social benefits that reach beyond the industrial district itself. The implementation of the model is, however, challenging and may be costly if synergies require infrastructural investments. Industrial symbiosis requires strategic collaborations between many organisations, technical and organisational capacity as well as strong leadership from the coordinating actor. The basic model of industrial symbiosis is very transferable. Its principles can be, and have been, successfully transferred between industrial districts located in different regions and lessons learnt can be shared between the locations. More importantly, the model is flexible, as it does not need to rely on shared infrastructure. It can also be extended to virtual symbiosis in which by-products are exchanged between actors who operate in different locations. 80 Business Models for Systemic Eco-innovations

83 4.2.9 Green Neighbourhoods and Cities Introduction Green neighbourhoods and cities are urban systems designed or redesigned to offer a high quality of life with minimum environmental impact. They involve the minimal use of energy, water and food, and waste output of heat, air, water and other pollution. Green city models combine many eco-innovative solutions ranging from novel designs and urban ecology to new technologies embedded in innovative buildings. The model engages a range of actors from both public and private sectors. Green cities should be self-reliant and thus, should not over-exploit the surrounding region. Examples of green cities and neighbourhoods analysed include DigiEcoCity in Finland and Swedish city of Hammarby Sjöstad. DigiEcoCity, Finland DigiEcoCity (DEC) is a unique Nordic city that combines ecological principles with innovations, which use ICT. The objective of the city model is to combine living, working, public and private spaces as well as culture and leisure within walking distance a human alternative to concentrated, crowded metropolises. DEC combines three concepts: 1) Digitally-integrated, high-interaction information systems which provide access to various city systems. These systems include: virtual services; telecommutications; online shopping; online building maintenance and management services; e- learning; interaction between home and school; e-health; and e-care; 2) Ecologically sustainable solutions that provide energy efficiency and material efficiency both in the buildings and at community level. The holistic building concept also covers the efficient use of space and adaptability; 3) Localised urban solutions that offer efficient logistics, new combinations of working and living, and functional diversity making the urban structure more resistant to changing social and macro-economic conditions. Hammarby Sjöstad, Sweden Hammarby Sjöstad is Stockholm s biggest green urban development project. The area s location, as a natural continuation of Stockholm s inner city, has helped shape the infrastructure, planning and design of the buildings. The eco-cycle solution in Hammarby Sjöstad is called the Hammarby Model. This model is the thread that binds together the entire environmental programme and demonstrates how the various technical supply systems are integrated into a symbiotic system. The approach aims to reduce energy consumption and waste generation, whilst maximising resource efficiency, the re-use of materials and re-cycling. For example, waste heat from the treated wastewater is used for heating up the water in the district heating system, which, in turn, heats the apartments and offices in the district Business Model System Analysis Main Actors Complex systemic solutions like green cities and neighbourhoods have an extended network of actors involved in various activities from designing and coordinating the overall initiative to building infrastructure and buildings. The key actors are: City authorities and government bodies offering political leadership and funding flagship projects such as the Administration of Stockholm and at least three city governments in China that have launched DigiEcoCity projects; Concept or city format designers and developers and often these are private companies like DigiEcoCity Ltd or Tommila Architects Ltd in the case of DEC; Business Models for Systemic Eco-innovations 81

84 Utility and public transport companies that are major service providers for residents, and organisations, as well as for each other. Involving them in the ecosystem is a very common practice in eco-city projects. In some cases, they also play the role of idea developers. In DEC they include Stockholm Water Company and Fortum and Stockholm Waste Management Administration that jointly developed a Hammarby Sjöstad eco-cycle model; Developers and builders that implement the project; Other partners including numerous service, product and technology providers, external suppliers of energy, water and other inputs such as construction materials, which are necessary in building and in the further lifecycle of urban areas. Citizens and local organisations are normally seen as being the customers in this model. Relations and Channels amongst Key Agents, Customers and Partners Unlike traditional, product/service based business models, this model centres on a long-term relationship between municipal bodies, utility companies, other service provider and the citizens. There are many channels to reach the customers and partners in the eco-city model, which often can be a direct service sale of water, heating, waste management or public transport. The channels among partners are the keys to sustaining their symbiotic system and are used for internal exchange of resources, raw material, waste and energy. Key Activities All sustainable city or neighbourhood projects are based on a set of sustainability components, which normally include more efficient and eco-friendly transport and housing, waste management and energy efficiency. Each of these components encompasses a combination of product and process innovations and supporting business models. Often these innovations start with isolated product or process related design, R&D, testing and optimisation activities. The idea of DigiEcoCity (DEC) evolved from the search for an energy efficient solution. At the beginning of the 1990s, Tommila Architects, together with a Swedish partner, developed a model for a department store in Sweden, which resulted in 80% savings in energy consumption. The underlying idea was to use natural ventilation and daylight. The idea behind DEC has evolved over the decades and has been shaped by reality. Figure 22 Business Model of DigiEcoCity Source: DigiEcoCity (2001) DigiEcoCity Project, The Role of Business Models in Green Transformation, Copenhagen January 19 th in a PowerPoint presentation 82 Business Models for Systemic Eco-innovations

85 Day-to-day activities include running the technological processes, maintaining the logistics of inputs and products and ensuring service provision. There is considerable variation in the way in which these activities are organised and in the decisions as to whether or not innovative elements are to be introduced. Resources The functioning of large complex systems such as eco-cities involves a wide range of resources. These are energy, water, construction materials and waste. Other important components of the system are technology/machinery, infrastructure for energy, water, public transport, logistics, waste collection and ICT. However, financial resources and investment is the most crucial element. Specific knowledge and expertise is also considered to be a resource that is strategically and functionally important to the design, development and management of the eco-city system. Value Creation The model provides a variety of values across the value chains. The customers/citizens enjoy values associated with a better quality of life and savings through more efficient consumption of water and energy. Non-monetary values, such as satisfaction from contributing to a better environment, can also be important for citizens who choose to settle in such eco-friendly neighbourhoods and pursue a more sustainable lifestyle. The model creates business opportunities for companies to capture various economic values. Activities that produce savings in energy, water and other resources offer good economic values for the utility companies. Symbiotic schemes can result in cost reductions compared to the cost of inputs that otherwise would have had be sourced externally. Service provision is the main source of value creation for utilities, as well as for transport and other companies that operate in eco-cities. Eco-cities and their residents should be a good market niche and source of value for companies who specialise in green products and services. City authorities also acquire a value through their green image and publicity about their involvement in the schemes. This can help to attract more motivated investors and companies, provide access to special governmental funding, and generate more political support. Figure 23 The Hammarby Model Source: GlashusEtt (2012) Hammargy Sjostad unique environmental project in Stockholm, The Role of Business Models in Green Transformation, Copenhagen January 19th in a PowerPoint presentation Business Models for Systemic Eco-innovations 83

86 Understanding the Impact across the Value Chain Upstream value chain activities in eco-city projects can be associated with the construction and installation activities. Often in such projects, more eco-friendly construction materials are used. The unavailability of technical information makes it is difficult to provide an objective assessment, but it is expected that the environmental impact will be more positive in comparison to the impact made by standard construction projects. However the major environmental benefits in these projects are expected to relate to the life/use phases. The areas that have achieved the largest reductions in environmental impact are water, sewage and heating, technical services for properties and construction materials, as well as car-pooling, cycling and using public transport. In the Hammarby Sjöstad model, the overall environmental impact of the area is 30-40% lower than for similar sized districts built in the 1990s. For example, car use is 14% lower than in comparable districts in Stockholm. Daily water use is 150 litres per person compared to 200 litres for the rest of Stockholm. In addition, the area includes many green spaces. It is hoped that work on the district will be finalised in 2015, and the ambition is that, by then, the district will produce half of the energy consumed in the area through a combination of energy efficient housing, re-use of wastewater and renewable energies. Similar environmental impacts are expected in DigiEcoCity models where efficiencies are also promoted via smart ICT applications. The economic impact on the upstream part of the value chain is associated with revenues from new business opportunities and the values captured by companies involved in implementing the eco-city projects. Potential economic benefits for citizens are associated with resources and transport efficiencies that are converted in financial savings. In addition, green city projects offer a range of opportunities for new economic, business, as well development, activities, which are often associated with the creation of new jobs and workplaces. DigiEcoCity also pursues the goals of enhancing social diversity and easing access to healthcare services and education. Figure 24 Sustainable City/Neighbourhood System Source: Technopolis Group based on adapted business model canvass by Osterwalder & Pigneur (2010) 84 Business Models for Systemic Eco-innovations

87 The Contribution to Radical/Systemic Change Sustainable cities and neighbourhoods are showcase examples of systemic ecoinnovations. Their systemic nature and complexity assume the involvement of a network of actors, the maintenance of extended chains of activities and the implementation of a number of business models. Overall the systemic innovation and business models behind the concept generate a wide range of values and impacts across upstream and downstream segments of the value chain. Most importantly, successful eco-city projects induce a change in the mindset and attitudes of its residents and organisations, shifting their choices towards more sustainable lifestyles and methods of functioning. The development of any eco-city project creates a surrounding innovation system that is quite complex and includes a range of technological, process and product, as well as social, eco-innovations. The application of such concepts requires a constant evolution of the knowledge and technologies for sustainable systems. There are already indications that the sustainable cities concept will be diffused very widely, which in the long run could have a major impact in terms of creating a more solid knowledge base, a stronger innovation system and increased competitiveness. It might also have a very promising impact on policy frameworks through imposing higher standards, creating specific measures, and generally attracting political attention, especially from city and regional authorities The Role of Policy in promoting Eco-innovations The information collected in the case studies shows that several policy instruments can promote sustainability-oriented innovation in cities. Environmental taxes are an important incentive and along with the regulation on harmful substances and activities, they provide a firm foundation for the introduction of change. The role of supply side instruments like funding for R&D, testing and commercialisation are relevant to specific solutions such as new products and technologies. More complex projects like sustainable cities and neighbourhoods that incorporate many elements, processes and technologies, as well as many actors, depend greatly on measures, which promote partnership, networking and matchmaking. An enabling infrastructure and enabling technologies are other important provisions for such projects. They can include ICT and satellite technologies that control the efficiency of processes, as well as infrastructures for water, energy, waste management and transport Concluding Remarks Eco-city models are an example of systemic eco-innovations, in which there is a clear vision for the concept of sustainable living, and it is approached in an holistic and systemic way. The models are based on a set of sustainability components, such as efficient and eco-friendly transport, housing, waste management and energy efficiency measures. Thus, there is a very important role for technological eco-innovations. Ecocity projects normally involve many actors including public authorities, businesses and community organisations. A central role is given to the residents, who are expected to follow sustainable lifestyles and change their attitudes towards consumption and mobility, and other aspects of everyday life. Many different actors benefit from the values created by the model. Residents enjoy values associated with a better quality of life and save money through a more efficient consumption of water and energy. Various businesses or companies working in areas such as utilities, transport, ICT, urban design, and relevant services are able to benefit from the economic and business opportunities offered by the Eco-city projects. Ecocities create markets for companies specialising in green products and in more Business Models for Systemic Eco-innovations 85

88 sustainable materials. City authorities also acquire value through their green image and publicity about their involvement in the schemes. The environmental impact created by this type of model is very large and is not limited to the resource and energy savings that are made through the application of more advanced technologies. It is assumed that the change in people s behaviour that results in more eco-friendly attitudes to daily life, transport and consumption will generate positive environmental impacts and also contribute to wider systemic eco-innovation. 86 Business Models for Systemic Eco-innovations

89 4.3 Comparative Analysis This section present a comparative analysis of the business models for eco-innovations discussed in the earlier section of this chapter, and aggregates the information about the role of policy measures in promoting eco-innovations. The analysis builds on the comparative overview of the major components of the discussed models and the values generated by the model on the micro level (company, customers, partners) and on the wider macro or/and systemic levels. Thus, the logic of analysis follows the from narrow to wide perspective of changes and impacts that each business model creates. It starts by reviewing the core value propositions and the value or first-order impacts created, it then considers the changes in the structural elements of the business models including business operations and customer-related aspects, and the section concludes with an overview of the potential systemic changes that might be generated by each type of model. The last-sub section summarises the observations about relevance of various policy instruments on the eco-innovations and discusses the insights Comparing Business Models Changes and Their Impacts Value Creation All analysed business models are based on creating new value, however, there are significant differences between the cases in terms of the type of value created for customers, the focal company, and the partners. Figure 26 summarises the case-based analysis of core value offered by the model and first-order values for economic. social/cultural and environmental value/impacts observed across the value chain. The core value proposition of a majority of cases is linked with cost savings, new revenue streams and profits. Economic savings are usually a result of resource efficiencies and savings offered by new solutions in the models based on new products, functional sales, ESCO, mobility-sharing, industrial symbiosis and green cities. While economic value or convenience are main selling points of new solutions, all of them offer a promise of environmental benefits, be it directly for the customer (e.g. safer and cleaner working environment) or for the society (e.g. less pollution, better use of natural resources). Environmental value is thus a core element of the business case. The Green cities model stands out by its explicit promotion of social and sustainability values, such as sustainable and environmentally friendly living and improved life quality (through ensuring convenience, green areas, efficient and ecomobility schemes, etc.) The growing importance of a green image is also a value that can be acquired both by potential consumers and producers of innovation. Knowledge exchange and learning are seen as an important value in multiple actor models like industrial symbiosis Business Model Innovation: Changes in Components Business model innovation is about the creation, or reinvention, of a business. Whereas innovation is typically seen in new products or services, a business model innovation is more about introducing different business strategies. These not only relate to new value propositions but also align the company s profit formula, resources, processes and partners to enhance its value proposition and to capture new market segments. A rapid overview of these changes across all of the types of business models is depicted in Figure 26. The table also presents the core values offered by each type of model, and structures the changes in elements of the company s business operations and its approach or activities with its customers.. Business Models for Systemic Eco-innovations 87

90 Figure 25 Value Creation and First-order Value Chain Effects Business model types Core value proposition Value creation Economic Social / cultural Environmental Eco-innovative products Products with better performance, savings, Saving and better performance for customers Green image Varies depending on the product. Profit for focal company and its suppliers Waste regeneration systems Revenue from waste valorisation, alternative products Revenue from enhancing the value of waste, alternative products Green image /bio brand Minimisation of impact of waste Renewable energy based systems Cheaper & cleaner energy Cheaper energy for customers Profit for focal company Green image Minimisation of impact of waste Efficiency optimization by ICT Economic savings due to more efficient management of resources Profit for focal company Convenience, Green image Energy and material saving Functional sales More efficient services Savings for customers Convenience Varies depending on the product and processes involved Innovating financing Resource saving Profit for focal company Convenience Energy and material saving, carbon emission reduction Mobility / sharing Flexibility, savings for customers Savings for customers Profit for focal company Flexibility Material/resource saving Industrial symbiosis Resource saving, higher efficiencies Resource savings learning Waste and emission reduction Eco-cities New business opportunities, sustainable and environmentally friendly living, life quality, convenience, efficiency Diverse economic opportunities for green companies involved in eco-city project Improved life quality, Green image Improved many aspect of environmental state (air, water, waste, traffic, etc), Source: Technopolis Group: Based on the analysis of the case studies The case studies highlight that in each business model s core there was a new or reconfigured value created both for company and its customers. They ranged from new products with better economic and environmental performances, to valorisation of waste, to wide range of saving and efficiency possibilities, to offering convenience for customers. Moreover, the business operations and relationship with customers in eco-innovation business models go through different degree of changes. Most changes in the observed cases seem to take place in the key activities, with R&D and product/process development activities being the most frequent case. In the service oriented models like functional sale and car sharing the change is expressed in the overall shift from product to service provision. Another frequently observed shift is associated with the reconfiguring the relationship with existing customers or building relationships with new customers (or both). New markets and customers are targeted in such models as waste regeneration (new farmers/user of soil conditioner), ICT solutions (larger coverage of people, firms, utility companies), ESCO (new companies willing to cut energy consumption), buyers of renewable energy (biogas, biochar, etc.) Approaching new customers or changing relationship with old customers requires building new or transforming existing channels to customers. While comparing between types of eco-innovation, the business model applied in waste regeneration systems seem to go through substantial transformation outreaching all components of the model. Multi actor business models of industrial symbiosis and eco-cities also appear to be about changing many components, while keeping themselves in the same market niche and service the same customers. 88 Business Models for Systemic Eco-innovations

91 Figure 26 Business Model Innovation: Changes in the Components Ecoinnovation / business model types Core value proposition Key activities Business operations Key partners Key resources Customer segments Customer issues Customers relations Customer channels Ecoinnovative products Products with better performance, savings R&D Changes of suppliers (no always) Other resources New customers/ market New relationshi ps New channels Waste regeneration systems Revenue from waste valorisation, alternative products R&D New suppliers Valorising waste as a resources New customers/ market New relationshi ps New channels Efficiency optimization by ICT Economic savings due to more efficient management of resources develop ment New customers and/or partners New customers/ market New relationshi p Functional sales More efficient services R&D (not always) New customers/ market New relationshi ps Innovative financing Resource saving Shifting to new services New relationshi ps New channels Mobility / sharing Flexibility, savings for customers Shifting to new services New partners New relationshi ps New channels Renewable energy based systems Cheaper & cleaner energy R&D New partners New customers/ market New relationshi p New relationshi p Eco-cities new business opportunities, higher efficiencies, improved life quality develop ment New network of partners New expertise New relationshi p New relationshi p Industrial symbiosis Resource saving, higher efficiencies R&D Reconfigur ed network of partners New expertise New relationshi p New relationshi p Source: Technopolis Group: Based on the analysis of the case studies Wider Impacts and Systemic Change The analysis of business models demonstrates that each type of the model potentially can generate wider scale economic, environmental, and socio-economic impact given the conditions are provided for larger diffusion and application of the model. The table below (Figure 27) summarises the analysis on wider impacts (economic, social/cultural, and environmental) generated by each type of business model. A majority of models analysed offer positive environmental impact associated with resources saving. This is often linked with a reduced footprint of consumption, especially due to application of novel products, technologies and processes which have better environmental performance. Models involving waste reuse or prevention activities (waster regeneration, industrial symbiosis) allow avoiding hazardous impact (air, soil, water contamination, GHG emissions) of otherwise untreated waste. A wider economic impact in a majority of models is linked to the creating of new economic opportunities via the proposed innovation and the creation of new market segments and customers base. Economic saving achieved though resource efficiencies is another frequently observed economic impact across the models. It is mostly seen on the level of individual consumers and producers, however a greater (accumulated) impact can potentially be achieved if the presented eco-innovative practices are diffused widely. Business Models for Systemic Eco-innovations 89

92 Figure 27 Wider or Second Order Impacts of Business Models Business model types Potential (second-order) impacts Economic Social / cultural Environmental Eco-innovative products Greener markets and economies Change in people s preferences towards greener products Reduced footprint due to use of greener products Waste regeneration systems Valorising waste and new market niche New jobs, diffusion of knowledge and technology Linked to prevention of waste, avoided extraction of natural resources Renewable energy based systems Linked to new economic activities Local employment GHG emission reduction Efficiency optimization by ICT Expansion of ICT sector, new business opportunities Linked to resource use optimisation and saving Functional sales New service markets niche Increased awareness of customers Innovating financing/esco New service markets niche Increased awareness of customers Mobility / sharing New service markets niche Flexibility, change in people s preference and attitude Reduced footprint due to resource saving and use of greener products/services Reduced footprint due to resource saving Linked to resource use optimisation and saving Industrial symbiosis Valorising waste and improving efficiencies Linked to resource use optimisation, symbiotic activities, waste reduction, Eco-cities Greener markets, new market niches, services Valorising waste and improving efficiencies High quality life, change in people s preference and attitude New job, Linked to resource use optimisation, symbiotic activities, waste reduction, Source: Technopolis Group: Based on the analysis of the case studies Social and cultural impacts can be measured in several ways: employment creation, knowledge diffusion, improved life quality and change of peoples attitudes and values. Some models have higher potential for creation of employment than others. Creation of new activities and services (ESCO, new renewable energy units) imply creation of new jobs, while change or greening existing practices might not provide such opportunities. Highest cultural change promises can be expected from the projects that encompass social innovation elements, e.g. sustainable lifestyle in Eco-cities, sharing practices in the mobility schemes. By fostering such cultural and behavioural changes, these innovations actually facilitate systemic changes toward sustainable practices in the long run Policy Implications In general, more than half of the cases studies reported that policies and government intervention played a positive role in implementing eco-innovative projects. A number of eco-innovations (e.g. projects on alternative energy, mobility, waste recycling) have benefited from national and EU innovation measures. Large-scale projects like green cities have been promoted by local governments and enjoyed the financial support from local investment programmes. Furthermore, stricter environmental standards and regulatory pressure have triggered business interest in introducing ecoinnovations or have created markets for new services enabling business to comply with the requirements. At the same time around a quarter of the cases reported negative impacts of policies on their eco-innovation activity. In particular, the difficulties arise due to excessive red-tape in government support measures, inflexible environmental regulations, government subsidies for certain sectors (e.g. subsidies for fossil fuels, mining) and resource pricing not taking into account environmental cost. The absence of long term national development strategies and programmes and increased uncertainty related to public support is an increasing concern for eco-innovators. The analysed companies ranked policy measures in order of their importance for advancing their eco-innovation activities. 90 Business Models for Systemic Eco-innovations

93 Figure 28 summarises observations across the types of business models. The results show that supply side policy measures play significant role in promoting most types of eco-innovations, notably in their early stage. Supply side instruments are particularly important for companies activities, the choice of partners as well as revenue streams. Particularly high potential is associated with: the funding and support measures for R&D (especially for product and technology based innovations), instruments supporting testing, demonstration (except for ICT solutions) and the early stage business development (Except for ECSO and waster regeneration). The market-based instruments are quite important support factor for emerging eco-innovations. Being rather indirect mechanisms, they appear to create strong incentives for most of the discussed innovation types. Among them, ecoand carbon taxes and regulations on harmful substances and activities were indicated as relevant in most of the cases. Carbon trading seems to influence development in energy and waste related eco-innovations. Among the demand side measures, performance standards, green labels and certificates showed to have some importance in developing new green value added products, materials and processes and most of the types, with exception of sustainable mobility and service based models. In general, the companies consider the networking measures least important. These instruments, however, were relatively more relevant in cases of promoting sustainable mobility and ICT based projects, which largely rely on provision of enabling infrastructure (e.g. Internet, GPS). A significant number of policy measures, both market-based as well as demand and supply side measures, can potentially impact on one or several components of a business model. Policy can also influence value proposition developed by companies for their models. In particular, market-based measures and demand side instruments often underlie the value proposition of the business models as they create a demand for new services and new knowledge. The strongest direct impact may be expected on components related to internal business operations, notably key activities and key resources. All market-based instruments (eco-tax, regulations as well as removal of harmful subsidies), demand side (notably public procurement) and supply side (R&D and demonstration support) measures are relevant in this context. Apart from measures dedicated to networks and collaborative research, policy has only an indirect influence on the selection of key partners. As expected, the impact on customer related segments is considered to be low, with demand side measures having relatively higher potential to directly influence customer segmentation, (notably measures like public procurement and consumer subsidies). Provisions on enabling infrastructures can have a direct impact on the companies possibilities to innovate their customer s channels and relations (e.g. broadband internet). Business Models for Systemic Eco-innovations 91

94 Figure 28 Importance of policy instruments for various types of eco-innovation Policy instrument New, green valueadded products & processes Waste regeneration systems Renewable energy based systems Efficiency optimization by ICT Functional sales and services Innovative financing /ESCO Sustainable mobility Industrial symbiosis Eco-cities Market based instruments Supply side measures Demand side measures Crosscutting measures Eco-tax, carbon tax *** **** * *** ***** ** ***** Cap and trade scheme ** ** *** Removal of harmful subsidies (e.g. fossil fuel subsidies) R&D funding and support Business development funding and support Support for testing and demonstrations Education and training Information brokering and advisory services Standardisation of technical elements Regulations on harmful substances and activities Performance standards, labelling, certification * ***** ***** *** ***** *** *** *** *** ***** **** ***** **** ** ** ** ** **** *** **** ** * * * * * * * * * ** *** ***** **** ** **** * **** **** * ** ** ** ** * Public procurement * * * * Consumer subsidies and pricing Support for technology transfer Provision of enabling infrastructures Support for networks, partnerships & matchmaking Foresight, roadmapping, scenario development * * * ** * *** ***** ** * * *** ** * *** * * **** *** 92 Business Models for Systemic Eco-innovations

95 5. Main findings from case studies 5.1 Key findings The analysis of the case studies suggests that business models are relevant for advancing eco-innovations in the market. Eco-innovations are often linked to novel business models radically different from business as usual. Instead of focussing on developing innovative technologies or products, companies create new ways of delivering value to customer, rethink their customer base, establish new alliances and reconfigure value chains, source new resources, etc. The analysed companies did adapt to a larger or smaller degree their business models to be able to introduce eco-innovations. Some companies revisited their value propositions to the customers; nearly all adapted their operations. Most changes in the analysed cases were related to company activities, notably to R&D and product development. In the service oriented models such as functional sales and car sharing there was a more fundamental shift from product to service provision. Another oft-observed change was to reconfigure the relationship with the old customers or revisiting the customer segments. The value propositions of majority of cases were based mainly on offering customers economic benefits, such as cost savings, new revenue streams and additional profits, and the better quality or service or product (e.g. flexible access, efficiency). Although environmental values have been rarely at the centre of business proposition, the expected environmental benefits, such as reducing the impact of waste or emission reduction, have been a relevant element supporting or inspiring new business models (e.g. waste regeneration, waste to energy, industrial symbiosis, mobility). The environmental value proposed has been especially evident in the case of green neighbourhood and cities where environmental aspects are among key drivers of change. Potential environmental impacts are among key expected outcomes of the analysed business models. A majority of the analysed models have a potential to generate indirect positive environmental impact associated with the resource and energy efficiency and with the use of new products or technologies with improved environmental performance helping to avoid air, soil, water contamination, and GHG emissions. These expected environmental impacts are often reframed to form part of the value proposition. The wider application of new eco-innovation business models may also have social impacts such as employment creation or improved quality of life. Business models based on new services and products (e.g. ESCO, new renewable energy units) appear to have a high potential to create new jobs. Incorporation of social elements in the business models increases the promise of systemic change. Green cities and mobility projects are exemplary in terms of sustainable lifestyle and new mobility paradigms being at the core of new solutions. Many elements of business models analysed appear to be transferable between companies and countries; clearly they have to be adapted to the local context, but lessons learned are widely applicable (e.g. industrial symbiosis and green city models has been adopted worldwide). Business models can only contribute to systemic innovation if they are widely diffused. Their diffusion and impact is, however, influenced by the framework conditions, which determine economic viability of any value proposition. However, new eco-innovation business models themselves may be one of the factors changing framework conditions and triggering emergence of new production and consumption patterns (e.g. through raising awareness of various stakeholders, promoting new standards, and creating new markets). Business Models for Systemic Eco-innovations 93

96 5.2 Policy messages Public policy can have significant direct and indirect influence on eco-innovation business models, even if in most cases it does not target business models explicitly. All types of policy measures can be relevant in framing business models. Based on the case studies, the supply side policy measures appear to be relevant in promoting the eco-innovations, notably in terms of supporting R&D of new products and technologies, as well as direct support for testing and demonstration activities at the early stage of business development projects. Support measures promoting various forms of networking and partnerships may be also relevant for the selection of key partners and indirectly influence business models. Demand side instruments are gaining importance in creating markets and a business case for eco-innovations. Among them performance standards, green labels and certificates appear to have higher importance in developing new ecoinnovative products, materials and processes. Public procurement and consumer subsidies have a promising potential for ensuring economic viability and diffusion of eco-innovative product and services. Provision of infrastructure and enabling technologies is another support measure that can trigger wider diffusion of specific typos of eco-innovations (e.g. ICT, sustainable mobility). Arguably, one can expect that especially demand side instruments influence customer base by creating demand for green products and service. The regulatory and market-based instruments were indicated as an important incentive for eco-innovation. Environmental and carbon taxes and regulations on harmful substances appear to be relevant in most of the cases. Carbon trading scheme was reported to create incentives for development of clean energy and waste related eco-innovations that potentially can generate carbon credits. The role of Government bodies has been most often indicated as an important driver in supporting new partnerships and creating wider favourable conditions for advancing new business models. Government support was especially significant in larger scale projects (e.g. green cities, industrial symbiosis, mobility). Considering the impact of policies on business models promoting eco-innovation, the design of public policies supporting eco-innovation should explicitly consider the dimensions of business model. This reflection should take into account possible wider impacts of business model changes on wider shifts in value creation, value chains and value systems. The impact of policies on new business model should be considered taking into account a mix of various policies, rather then singled out policy measures. 94 Business Models for Systemic Eco-innovations

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99 Nelson, R.R., National Innovation Systems: A Retrospective on a Study. Industrial and Corporate Change, 2, pp Nidumolu, R., Prahalad, C.K. and Rangaswami, M.R., Why Sustainability Is Now the Key Driver of Innovation, Harvard Business Review. OECD, 2008a. Eco-Innovation Policies in the United States, Environment Directorate. Paris: OECD. OECD, 2008b.Eco-Innovation Policies in Japan, Environment Directorate. Paris: OECD. OECD, Eco-innovation in Industry: Enabling green growth. Paris: OECD. OECD, 2011a, Towards green growth. Paris: OECD. OECD, 2011b, Fostering innovation for green growth. Paris: OECD. Osterwalder, A., Pigneur, Y., Smith, A. and 470 practitioners from 45 countries, Business Model Generation. Available at:</ Philips, 2007, Sustainable innovation: Exploring a new innovation paradigm, by Dorothea Seebode, Philips Porter E.,M, Van der Linde C., Towards a new conception of the environment competitiveness relationship. Journal of Economic Perspectives, 9, pp Reiche, D., Renewable Energy Policies in the Gulf countries: A case study of the carbon-neutral Masdar City in Abu Dhabi. Energy Policy, 38(1): pp Scrase I., Stirling A., Geels, F.W., Smith A. and Van Zwanenberg P., Transformative Innovation: A report to the Department for Environment, Food and Rural Affairs, SPRU - Science and Technology Policy Research, University of Sussex. Smith, K., The challenge of environmental technology: promoting radical innovation in conditions of lock-in. Final report to the Garnaut Climate Change Review. Steward, F., Breaking the boundaries. Transformative innovation for the global good, NESTA provocation. The White House, A Strategy for American Innovation: Securing Our Economic Growth and Prosperity. Available at:< [accessed January 2012]. Tukker, A. and Tischner, U., New Business for Old Europe: product-service development as means to enhance competitiveness and eco-efficiency. Final Report of SUSPRONET. Tukker, A., Eight types of Product-Service Systems: Eight Ways to Sustainability, Innovating for Sustainability, Business Strategy and the Environment, 13, pp van Beers, D (2007) "Capturing regional synergies in the Kwinana industrial area status report", CSRP Project 3B1 Report, July 2007 Van Berkel, R., Fujita, T., Hashimoto, S., Geng, Y., Industrial and urban symbiosis in Japan: Analysis of the Eco-Town program Journal of Environmental Management, 90, pp VROM, 2003, Transition progress report. Making strides towards sustainability, Ministry of Housing, Spatial Planning and the Environment, Directorate-General for the Environment, The Hague. WBCSD, World Business Counsil for Sustainable Development, Vision 2050 report. Business Models for Systemic Eco-innovations 97

100 Yang, S., Feng, N., A case study of industrial symbiosis: Nanning Sugar Co., Ltd. in China. Resources, Conservation and Recycling, 52(5), pp Zott, C., Amit, R., and Massa, L., The Business model: Theoretical roots, recent developments, and future research. Working paper WP-862, IESE Business School, University of Navarra. 98 Business Models for Systemic Eco-innovations

101 Annex 1. Cases of business models for eco-innovations covered in the literature review Energy service companies (ESCO), Chemical management companies (CMS), Sharing or renting based business models Business model for ecoinnovations Design-buildfinanceoperate (DBFO) Integrated Pest Management (IPM) & performance based pest management (PPMS), Functional sales Description / definition An ESCO provides energy-efficiency-related and other value-added services and assumes performance risk for their project or product Their compensation and profits are tied to energy efficiency improvements and savings in purchased energy costs) (EPA 2009) CMS is a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer's chemicals and related services. Under a CMS contract, the provider's compensation is tied primarily to quantity and quality of services delivered not chemical volume. (EPA 2009) The basic idea of sharing business models is that instead of private ownership, the product is shared among a number of users, whenever the individual user needs access to the product. (e.g. car-sharing, car-pooling, sharing of holiday houses, laundry facilities, etc.) These sharing models consumer does not pay for buying a product but only for using it (FORA, 2010). DBFO model is a contractual relationship between a customer and a private contractor used for construction projects requiring long-term investments. Most of DBFO model is a form of Public-Private Partnership (FORA, 2010) In performance-based pest management, a pest management services provider commits to achieving a certain standard or level of pest control, rather than being compensated for a particular treatment or application. Intergrated Pest Management services are the green implementation of this concept (EPA, 2009) Functional sales is a generic model with common characteristics for all service based business models. In general for all models there is a focus on providing the function and benefits of the product instead of the physical product as such. Instead of paying for the product per se a part of the transaction is payment for the function of the product. The service provider takes over the control of the use-phase of the product. By improving the control of the use-phase of the product the producer gets an incentive to improve the output yield and to extend the life-span of the product by making the product more durable, reducing the need for spare parts, making it more energy efficient, improve maintenance of the product etc. These models can encourage for References to examples presented in the literature addressing specific models FORA (2010); EC & COWI (2008) presenet examples of: - Energy performance contracting by Schneider Electric, - ESCO solutions for food industries by Danfoss, - ESCO for real estate owners by Dalkia, more examples in FORA (2010), EPA (2009); Halmea, et.al (2007) A number of cases are presented or referred to in the studies by FORA (2010); EC & COWI (2008); as well as EPA (2009); Halmea, et.al (2007) e.g. Kermira s servsec in water intensive industries, Argentum consultancy, AGA Gas, etc. Examples presented in literature - Car-sharing models Better place and Bilkollektivet in Johnson and Suskewitcz (2009); Meenakshisundaram and Shankar (2010); FORA(2010) and Behrendt, et al. (2003) - City bike-sharing system in Paris discussed in OECD (2009) - Eco-express washing/laundry services in Behrendt, et al FORA (2010) and EC & COWI (2008) discusses the following DFBO projects: - Road projects in Norway - Kaivomestari school, swimming pool and sport center project - Waste to energy plants by Waltrec - Street lightning system EPA (2009) provides very detailed analysis of the general model and briefly refers to few real life examples: - Syngenta Crop Protection, Inc. program called Citrus Solutions - Western Farm Service providing crop monitoring, soil testing, and weather station networks - The Lodi-Woodbridge Winegrape Commission partnersing programme between producers and pest managers The model s idea is discussed in Tukker, (2004), Tukker and Tischner (2004) and FORA (2010). The last provides examples of: - The Swedish company Volvo Aero amongst other things develops and produces components for aircraft and gas turbine engines. The company offers traditional service but it also offers a flight hour agreement basically selling flight hours to clients - The Swedish company ITT Flygt sells pump capacity - in contrast to just selling the submersible pump - Swepac provides operational Business Models for Systemic Eco-innovations 99

102 Industrial symbiosis Eco-cities/ sustainable cities Telepresence/ videoconferenc ing services Cradle to cradle (C2C) based business models remanufacturing and reuse of the product (FORA, 2010) The core of Industrial symbiosis is a shared utilization of resources and by-products among industrial actors on a commercial basis through interfirm recycling linkages. The aim of industrial symbioses is to reduce costs and environmental impact of participating companies and municipalities. In industrial symbiosis traditionally separated industries engage in an exchange of materials and energy through shared facilities. The waste of one company becomes another s raw material. (FOR A, 2010) It is a complex system combining many of ecoinnovative solutions. Eco-city designed with consideration of environmental impact, inhabited by people dedicated to minimization of inputs of energy, water and food, and waste output of heat, air pollution - CO2, methane, and water pollution. Such city can feed itself with minimal reliance on the surrounding countryside, and power itself with renewable sources of energy. The crux of this is to create the smallest possible ecological footprint, and to produce the lowest quantity of pollution possible, to efficiently use land; compost used materials, recycle it or convert waste-to-energy (Wikipedia) Telepresence allows people in different locations to communicate in a simulacrum of face to face exchange far superior to that achieved by traditional video-conferencing. It helps to avoid extensive travel and avoid associated carbon emissions(epa, 2009) Cradle to cradle (C2C) is at its core a holistic design and production paradigm striving for a society that produces no waste and recycles everything (relate also to Closed loop/ recycling/ upcycling concepts). But it is also a green business model that stimulates innovation through the development of new products with a competitive edge. The concept is based on a bio-inspired approach to the design of products and systems where nature is seen as a closed loop production system with solar energy as the only external input (FORA, 2010) leasing with maintenance contracts of soil compactors - instead of selling the soil compactors - Industrial ecosystem creation by Nanning Sugar Co., Ltd in China presented Yang and Feng (2007) - The Industrial Symbiosis in Kalundborg, Denmark (FORA, 2010) reference to many other example are given also in Christensen, J. (2004), Chertow et al. (2004) - Case of Masdar city in the United Arab Emirates is discussed in Johnson and Suskewitcz (2009) and Reiche (2010) - Eco-Town Programme promoting urban and industrial symbiosis in Japan presented in Van Berkel, et al (2009) EPA (2009) extensively analyses this model and refers to the examples of - HP Halo Collaboration Studio by Cisco corporation ; - Polycom Viewstation Ex, - Tandberg, etc. Examples from the literature include examples from - carpet manufactures as InterfaceFLOR, Desso, EcoWorx carpet backing (in Carillo- Hermosilla, 2008, Confino, J. 2011, Louche et al, 2010) - biolastic bottled for water and upcycling (Bowden et al, 2009) - waste equals food concept in the model of the German window manufacturer Schüco (FOR A, 2010) ICT solution based models Urban transport system based on biogas Electric cars based transport system ICT technologies provide a wide range of solutions for energy and resource use control, establishment of smart grids, cloud computing. ICT is also an important part of many novel technologies and systems solutions like industrial ecosystems, green mobility systems, etc. The city public and private system that fully switch from fossil based fuel to the biogas/bio methane. The system, includes several elements, including: - biogas production using the organic industrial, agricultural (e.g. food and manure) and sewage waste - specifically adopted transport (buses, cars, lorries) - infrastructure for fuelling (biogas fuelling station) - infrastructure for storing and transporting the biogas The system including the all necessary facilities (battery charge/replacement facilities, additional IT/GPSR technologies, etc.) for mass application of electric vehicles. Often also incorporates the car sharing/renting system Source: Authors, based on literature review FORA (2010) provides example of GreenQloud which specializes in public cloud computing services for companies and individuals based on the excessive green energy available on Iceland Martin, (2009) describes the case of Linkoping (Sweden) city that has successfully introduces biogas based transport system including public transport (bus and train) and private cars, and all necessary infrastructure Johnson and Suskewitcz (2009); Meenakshisundaram and Shankar (2010) present Better place electric car sharing system 100 Business Models for Systemic Eco-innovations

103 Annex 2. List of case studies of eco-innovation Country and Case Company name Sector (s) Major product/ service type Caroma dual flash toilet CSIRO Powder Coating UNSW Vanadium Redox battery GWA Bathrooms and Kitchens CSIRO Australia University of New South Wales Water and waste water Industry general Chemical engineerin g Bathroom and kitchen products Industrial research Research New, green valueadded materials/product s/processes New, green valueadded materials/product s/processes New, green valueadded materials/product s/processes Alcoa Bauxite Residue Humolea Alcoa, Western Australia Apostolos Vlyssides Metals Chemical Engineerin g Alumina producer Sustainable olive oil production, soil conditioner Ecoera Biochar Ecoera AB Agriculture Biochar soil enhancement and Carbon Offset Services Waste regeneration (reuse, recycle as new products) Waste regeneration (reuse, recycle as new products) Waste regeneration (reuse, recycle as new products) Brite Hellas PanePower Solar Windows Torresol Energy Solar Power plant Solray Energy Super Critical Water Reactor Preseco Oy biocarbon Waste Solutions, Cigar Biogas Reactor Intelen social energy networks Carta Sense wireless sensons for food supply chain TaKaDu online water monitoring Greece Brite Solar TORRESOL ENERGY INVESTMENTS Solray Energy Solar Technolog y Energy Waste to Energy PanePower Solar Windows Concentration Solar Power Installations Super Critical Water Reactor Preseco Waste Developing biocarbon out of organic waste Waste Solutions Intelen Social Energy Network Waste water treatment ICT Wastewater treatment and biogas production Meter Data Management, Smart grid applications CartaSense Food wireless sensing system to monitor quality of food products TaKaDu Water Water Infrastructure Monitoring - Software as a Service Renewable energybased system Renewable energybased system Renewable energy based system Renewable energy based system Renewable energy based system Efficiency optimization by ICT: Efficiency optimization by ICT: Efficiency optimization by ICT: Qlean nonchemical cleaning Olean Scandinavia AB Services Cleaning Services Functional sales and management services Danfoss ESCO Danfoss Solutions A/S Industrial Sector ESCO Solutions Innovative financing schemes Business Models for Systemic Eco-innovations 101

104 SkyCab transit system Better Place electric car network system SkyCab AB Transport Intelligent public transport Better Place Transport Electric vehicle facilitation Sustainable mobility systems: Sustainable mobility systems: Kwinana Regional Synergies project Kwinana Industries Council Industrial symbiosis Heavy industry Industrial symbiosis DigiEcoCity DigiEcoCity Constructi on Stockholm Hammarbysjostad econeighbourhood Hammarbysjostad Constructi on Concepting and implementing new city structures Architectural / planning services Green neighbourhood and cities: Geographically wide application Green neighbourhood and cities: Geographically wide application 102 Business Models for Systemic Eco-innovations

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