TNO University_12.06.2012

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Arnold Tukker Program manager Societal Innovation & Economy, TNO, NL Professor of Sustainable Innovation, NTNU, NO:

New Sustainable Business Models Arnold Tukker Program manager Societal Innovation & Economy, TNO, NL Professor of Sustainable Innovation, NTNU, NO Product Services – Circular and Viable Business Models? Globe-Europe BEE Event ‘The Leasing Society’, Europarliament, Strasbourg, 12 June 2012

Circular ‘leasing’ business models: why relevant:

12 June 2012 New Sustainable Business Models 2 Circular ‘leasing’ business models: why relevant Resource constraints become limits for Europe’s ‘Innovation Union’ Costs & access: Peak Oil and Peak Minerals 80% carbon reduction by 2050 for 2 o C 40% ‘water gap’ in 2030 > 1 Earth used by our economy (EF) 36% of all biomass used by Humans Europe depends on (virtual) imports of water, land, materials …where policy focuses on carbon/energy Resource efficiency is the only win-win answer available Cleaner production, ecodesign, circular business models and sustainable lifestyles Supported by right policies and right consumption based indicators for carbon, materials, water, land / biodiversity UN Resource panel decoupling report, 2011 TNO, CML et al.: EU FP6 EXIOPOL results, 2011

Product Service & Leasing Systems: what is it?:

12 June 2012 New Sustainable Business Models 3 Product Service & Leasing Systems: what is it? Value mainly in product content Value mainly in service content Product-service system Product content (tangible) Service content (intangible) Pure Product A: Product oriented B: Use oriented C: Result oriented Pure service + financing and maintenance Car sales…. Car sharing & leasing systems Chemical leasing Or for instance Energy saving companies Design, build , finance , operate Copier leasing

Shift to Product-services – a win-win?:

Shift to Product-services – a win-win? Business rationale Commoditization of products -> diversification Clients focus on core competences -> outsource GNP is determined for over 50% by intangible value Sustainability rationale Profit centre is the service, not product Incentive for low material use and high component re-use 12 June 2012 New Sustainable Business Models 4 ‘Throughput’ linear business model ‘ Circular ’ business model Closed technical cycle Payment on the basis of service provision

PSS can work well – but be aware of business pitfalls!:

12 June 2012 New Sustainable Business Models 5 PSS can work well – but be aware of business pitfalls! Value : Tangible value Intangible value Costs : Use of resources & labor Transaction costs Capital costs, risk profile, and ambiguity of the offering Power and dynamics : Power in the value chain / potential to capture value Speed of innovation, learning, and option value Investment in new core capabilities, cannibalisation and loss of synergies DE was a coffee maker, not a machine builder nor machine leasing company…but they improved greatly their power in the value chain of coffee provision A car sharing car does not give the same ‘dreams & identity’ as that Alfa Romeo you own…. Police performance contracts with perverse incentives / Complex DBFO contract systems with high transaction costs & higher risks

To conclude: PSS:

12 June 2012 New Sustainable Business Models 6 To conclude: PSS Inspiring concept But it is not a panacea ! Clear business pitfalls , particularly in B2C Many ‘ idealistic ’ PSS & Leasing concepts failed Rather , let smart businesses invent them … …. and listen to them what works and not ! And support this with policies that reward resource-efficiency Demanding high quality (= expensive ) waste management Taxing of resources rather than labor …. … monitored by appropriate indicators from an industry and consumption perspective (carbon, water, land, materials )

PowerPoint Presentation:

Thanks for your attention! 10 januari 2011 7 New Sustainable Business Models

PowerPoint Presentation:

Reserve slides 10 januari 2011 8 New Sustainable Business Models

..which gives a clear design challenge:

12 June 2012 New Sustainable Business Models 9 ..which gives a clear design challenge PSS type Advantages Disadvantages 1: Product oriented services Easy to implement Close to core business Incremental environmental benefits (20%) 2: Use oriented services Medium (Factor 2) Changes consumer behaviour Very successful in B2B context. Low intangible added value => consumer acceptance difficult, because of ownership conflict etc. 3: Result oriented service Radical (Factor x potential) Risks/ Liabilities How to measure result? Customer loses power over means

Shift to PSS – the business hope:

12 June 2012 New Sustainable Business Models 10 Shift to PSS – the business hope Business and consumers concentrate on ‘core competences’ and hence need more integrated (outsourced) solutions Many products become commodities -> diversification is the only strategy to escape price competition Unique, customized product-service bundles (solutions) Unique, monopolized client knowledge and relations GNP is determined for over 50% by intangible value + = 5 $/shoe 100 $/shoe

The shift to PSS – the sustainability hope:

12 June 2012 New Sustainable Business Models 11 The shift to PSS – the sustainability hope Only one earth (not 4) We need the satisfaction, not the product Services are weightless PSS is the key to Factor 4 ! So if business becomes service-oriented sustainable paradise will follow

Contribution of new business models to decoupling:

12 June 2012 New Sustainable Business Models 12 Contribution of new business models to decoupling

Types of PSS: classification in more detail:

12 June 2012 New Sustainable Business Models 13 Types of PSS: classification in more detail Value mainly in product content Value mainly in service content Product-service system Product content (tangible) Service content (intangible) Pure Product A: Product oriented B: Use oriented C: Result oriented Pure service Product related service Product related advice/ consultancy Product lease Product renting/ sharing Product pooling Pay per service unit Activity manag-ement Functional result

But…PSS is just a specific business model:

12 June 2012 New Sustainable Business Models 14 But…PSS is just a specific business model Definition of a business model: “a description of how a company or a set of companies intend to create and capture value with a product or a service. A business model defines the architecture of the product or service, the roles and relations of the company, its customers, partners and suppliers, and the physical, virtual and financial flows between them” (Ballon and Arbanowski) Technological Architecture Value Network Reven ue Model Value Proposition Generates revenues Devides cost and revenues Generates cost Uses Enables Delivers

..and needs to be evaluated on business sense! :

12 June 2012 New Sustainable Business Models 15 ..and needs to be evaluated on business sense ! Key point: how to sustain the creation and capturing of value Creation is not enough, you have to capture it Capturing at some point is not enough, you have to sustain this Sustainability researchers hardly looked at business literature!

Some examples that worked….:

12 June 2012 New Sustainable Business Models 16 Some examples that worked…. Swiss mobility car sharing Lowers access threshold Conveniently located Avoids parking problems Douwe Egberts Coffee Services Avoids fights on dirty kitchens etc. Easy for management Puts DE in power node Chemical management services Incentives low use of chemicals ..but does not work in Germany, where firms want to keep control on hazards themselves Catering and cleaning services for offices

Some examples with limitations….:

12 June 2012 New Sustainable Business Models 17 Some examples with limitations…. Functional Basic performance Basic function Intangible aspects of goods Create and signal identity Fulfill dreams Think of differences between Car owning and car sharing Wine bottles versus cardboard pack Nike shoes (100$) versus unbranded (10-20$)

Some examples that failed:

12 June 2012 New Sustainable Business Models 18 Some examples that failed ABB and ‘power by the hour’ Electricity efficient motors, but expensive -> result oriented service Sales people sold on volume, not expecting rising energy price Result: ABB had multi-year contracts with losses Ahrend and office furniture PSS Leasing and re-furbishing may be interesting ‘But hey, look – we have a production plant. We went back from 3 to 2 shifts, and cannot afford ourselves going back to 1” British Airways outsourcing catering Caterer squeezed out personnel, that went on strike BA could not influence this situation In 2007, BA had to fly for weeks without meals Performance contracts with the Police …difficult if performance quality has important intangible aspects… …in some countries you see police agents fining pedestrians walking through red lights by the end of month, to ‘make their target’

Typical business issues per PSS type :

12 June 2012 New Sustainable Business Models 19 Typical business issues per PSS type Product oriented service More convenient for consumer You may even ask a significant premium…. …but it only works if you can run this alternative business (e.g. washing machine builders are not the best repair firms) Use oriented service In principle more cost effective But much lower intangible and tangible value (compare car sharing with a car) Result oriented service Can be much more effective and opens the door for fully new function fulfillment But often needs totally new capabilities, has worse cash flow properties, lies all risks with provider, and the offering may be difficult to specify

Typical environmental issues per PSS:

12 June 2012 New Sustainable Business Models 20 Typical environmental issues per PSS Product oriented PSS: marginal improvements Use oriented PSS: typically a factor 2 improvement Result oriented PSS: major improvements possible

Introduction:

12 June 2012 New Sustainable Business Models 21 Introduction Business and sustainability hopes on PSS Economic viability Environmental performance Conclusions Book based on SusProNet, funded by EU FP5, Greenleaf Publishing, 2006

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