Last year, the CEO of Fortune 250 energy provider NRG wrote a letter to shareholders about the lack of innovation in the energy industry. “There is no Amazon, Apple, Facebook or Google in the American energy industry today,” David Crane wrote. “NRG is not that energy company either, but we are doing everything in our power to head in that direction – as fast as we can. But we need to pick up the pace further, and that is what we intend to do.”
Although NRG’s portfolio still includes 30% coal-generated power, it is repositioning itself and its business model to guide energy users from a grid-based power system to a distributed generation system. It’s also developing products and services related to electric vehicles, rooftop solar and home energy efficiency.
As business leaders begin to see themselves as part of a larger system that is grappling with challenging business conditions – in NRG’s case, climate change risks, the possibility of a price on carbon, and disruptive innovations in renewable and distributed energy – many recognize the need for dramatic shifts in the way they do business. They also see new opportunities to help their customers adapt to and thrive in a more sustainable future.
In a forthcoming report on business model innovation, Model Behavior II: Strategies to Rewire Business, SustainAbility tells the stories of four multinational companies that have shifted their business models to become more sustainable.
For Novelis, rather than continuing to source virgin, primary aluminum, it moved to recycled aluminum because it made more financial sense and would position the company to be resilient to climate change.
To differentiate itself from competitors at the high and low end of the market, Starbucks realized that green building provided more value to numerous stakeholders.
Fibria acknowledged that while demand for its traditional paper products would remain strong for years, it was risky to depend on historic patterns of demand and began to shift its mindset about how to use its forest and land assets differently.
And as part of a larger effort to retain its core customers – farmers – Syngenta changed its sales approach to focus more on what farmers needed to capture extra value from their yields.
The new models adopted by these companies are more financially sound in the long term. They also provide increased value to communities, employees, the environment and future generations. Ideally, the business case for a shift towards greater sustainability is clear for large companies. But the link between sustainability and financial gain may be murky for some companies or industries, especially when those industries have historically externalized costs. Nonetheless, part of the appeal of system-level transformations, including business model shifts, is reconsidering the economic landscape so that new, radical and more sustainable developments also make financial sense.
What might the future hold? What if pharmaceutical companies contributed to disease prevention alongside treatment, or if food and beverage companies profited based on improved nutritional outcomes? What if entertainment companies educated their audiences as much as they amused them? Could oil and gas companies take the lead in the transition to a low-carbon economy, becoming the key to rapid scaling of renewable energy? Or might agricultural companies become profitable by prioritizing the value chain livelihoods and ecosystems upon which they depend? These are the kinds of business model shifts towards sustainability that we need to see to ensure a sustainable future.
In the past, sustainability innovation has been focused on creating new products or processes that incrementally enhance an established business or brand. But companies must be more ambitious in their innovation aims, and business model innovation provides a path forward for companies that wish to prepare for and succeed in a more resource-constrained future.
For any one company, business model innovation for sustainability will derive from a confluence of three key factors: evolving external conditions; the company’s underlying culture and capacity to innovate; and the actions and intentions of the sustainability innovator.
The companies and innovators that focus on these factors will create business models that can initiate and thrive in a more sustainable future. This will require ambitious leadership from inside companies: both CEOs and individual sustainability innovators must stick their necks out to create and support a vision of what a new business model might look like.
NRG and its CEO have set the bar high for other companies in the energy industry. In a series of upcoming posts, we will examine how each factor drives business model innovation for sustainability.