Sustainable Business Model Hurdles: Fighting Short-termism and Valuation Problems

Firms looking to develop a sustainability-based business model may run into challenges that limit their ability to achieve their vision and goals. Based on Bocken, Short, Rana, and Evans’ 2014 review of sustainable business models, often developing an effective business model involves organizational, social, and technological elements. Social and organizational elements can often be delivered at little or no cost, however, technological elements typically require capital investment. These technological archetypes typically are not only capital intensive but can also be much more complex and interconnected with many different business elements. These hurdles can represent large barriers to organizations that are capital constrained, especially when combined with short-termism and valuation problems that can create some of the largest issues for an organization hoping to move to a more sustainable business model (Winston 2014, 82). Ensuring there is strong buy-in from leadership is critical to overcoming these challenges. Having leadership that supports sustainable elements in financial decision making processes, and removing the fear of failure, can help organizations not only empower their managers and employees, but also provides the education needed to ensure a strong culture of sustainability and innovation is embedded within the entire organization.

Valuation problems rise from the complexity and difficulty of converting qualitative information into quantitative economic value. While the solution of value for stakeholder relationships is difficult, we can look to other aspects of sustainability that have dealt with similar issues. For example, The City of Snoqualmie in Washington state knew that their forests were an integral portion of their community and had other benefits like stormwater retention and water quality improvement. However, funding the increase or retention of these green assets was difficult to secure. The City worked with The Keystone Concept, a consulting firm, to help them provide firm economic valuation to their urban forestry program. To determine a value per acre of forest they looked at how much stormwater an acre of forest could retain for example, and then how much a traditional infrastructure project would cost to achieve equivalent results. Utilizing this method over a different number of benefits they were able to determine that their forests provide $5.8-7.3 million dollars in value annually to the city (The Keystone Concept 2020, 2). Using a similar approach, using known metrics, like advertising costs to gain more customers, an organization could determine the value of improved stakeholder relationships and fund those programs similar to how they would their advertising fund. While the issue of defining value for qualitative elements is difficult, and open to many different interpretations, basing an analysis on elements that are known and providing error margins to the evaluation can provide leaders with more holistic analysis to make better investment decisions.

Author: Logan Callen

References

The Keystone Concept. 2020. “Natural Infrastructure Assessment: City of Snoqualmie”. Accessed January 16, 2020. https://www.thekeystoneconcept.com/s/Snoqualmie_Final_FullSpread_092520_ReducedSize.pdf.

Bocken, N, S. Short, P. Rana and S. Evans. 2014. “A Literature and Practice Review to Develop Sustainable Business Model Archetypes.” Journal of Cleaner Production 65: 42-56. https://doi.org/10.1016/j.jclepro.2013.11.039.

Winston, Andrew S. 2014. The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, and More Open World. Boston, MA: Harvard Business Review Press.