Sustainable Business Models for Eco-Design and Innovation - The Case of Riversimple

Abstract

The idea that companies (and other kinds of organisation) should strive for “sustainable business models” in order to contribute to a sustainable development of the natural environment, society, and economy is becoming increasingly popular. But it is misleading. A business model per se cannot be sustainable. It is a model. And as such it integrates a variety of socially constructed, interrelated and context-dependent concepts (e.g. value, target groups, resources). It is a tool, i.e. a means, and not an end. Business models, if developed and managed properly, can support sustainable business processes, products, services, and environmentally and socially beneficial forms of consumption. But in all these cases, the attribute “sustainable” rather refers to the respective processes, products, etc. Therefore, to be precise, we should speak of “business models for sustainable products” and so forth, or, in general, “business models for sustainability” or “BMfS”. Separating the business model (the means) from the sustainability issue to be solved (the end) is an important first step before we can systematically and effectively think about how business models can support sustainable business. Following this line of thought, this contribution to the EcoSD Annual Workshop 2015 distinguishes and then brings together two issues: the eco-design question and the business model question. The first asks: How to create useful artefacts that generate as much utility and joy as possible, using the smallest possible amount of natural resources, including footprints, for the longest possible period of time? The second is about a different but related issue: How to market eco-designs and innovations to unfold their full sustainability potential, in ways that allow users to easily adopt them and that allow eco-entrepreneurs to make a business? Practitioners such as Riversimple founder Hugo Spowers, who is an eco-design and business pioneer in the field of e-cars, increasingly call for a move to the business model level: “Disruptive technology can only work if it comes with a new business model.”

Full text

The challenges of eco-innovation
From eco-ideation
toward sustainable business models
EcoSD Annual Workshop 2015
Coordination :
François
Cluzel,
Benjamin
Tyl,
Flore
ValleT

Sustainable business models
for eco-design and innovation
The case of Riversimple
Florian LÜDEKE-FREUND
Faculty of Business, Economics & Social Sciences, University of Hamburg
Hamburg, Germany
Center for Sustainability Management (CSM), Leuphana University
Lüneburg, Germany
1.
IntroductIon
The idea that companies and (other kinds of organisation) should strive for
“sustainable business models” in order to contribute to a sustainable development
of the natural environment, society, and economy is becoming increasingly
popular. But it is misleading. A business model per se cannot be sustainable. It is
a model. And as such it integrates a variety of socially constructed, interrelated,
and context-dependent concepts (e.g. value, target groups, resources; cf. (Wirtz
et al., 2016)). It is a tool, i.e. a means, and not an end (Doganova & Eyquem-
Renault, 2009). Business models, if developed and managed properly, can support
sustainable business processes, products, services, and environmentally and
socially benecial forms of consumption. But in all these cases the attribute
“sustainable” rather refers to the respective processes, products, etc. Therefore, to
be precise, we should speak of “business models for sustainable products” and so
forth, or, in general, “business models for sustainability” or “BMfS” (Schaltegger
et al., 2016a; Wells, 2013a). Separating the business model (the means) from the
sustainability issue to be solved (the end) is an important rst step before we
can systematically and effectively think about how business models can support
sustainable business.
Following this line of thought, this contribution to the EcoSD Annual Workshop
2015 distinguishes and then brings together two issues: the eco-design question
and the business model question. The rst asks: How to create useful artefacts that
generate as much utility and joy as possible, using the smallest possible amount of natural
resources, including footprints, for the longest possible period of time (Schmidt-Bleek, 2000)?
The second is about a different but related issue: How to market eco-designs and
innovations to unfold their full sustainability potential, in ways that allow users to easily adopt
them and that allow eco-entrepreneurs to make a business (Boons & Lüdeke-Freund, 2013)?

The challenges of eco-innovation
58
While eco-design, or more broadly speaking eco and sustainability innovation,
is a dynamic topic in academic research and business practice, we are only
beginning to explore the relationships between eco-design and business models.
There is no doubt that moving to the business model level, as a step beyond
processes, products and services, is a worthwhile endeavour. It holds the promise
of multiplying the positive effects of eco-design through a deliberate focus on
how businesses create value under market conditions. Practitioners such as
Riversimple founder Hugo Spowers, who is an eco-design and business pioneer
in the eld of e-cars, increasingly call for this move to the business model level:
“Disruptive technology can only work if it comes with a new business model.”
(Hugo Spowers, in Wysocky, 2014).
This paper offers some general thoughts about BMfS and their relation to
eco-design, the barriers that inhibit their emergence and how business model
innovation can overcome these barriers. The case of Welsh e-car designer
Riversimple is used as an example of eco-design and business model innovation
in practice.
2.
APProAchIng busIness models For sustAInAbIlIty
Based on Chesbrough and Rosenbloom (2002) and Doganova and Eyquem-Renault
(2009), we have dened business models as “market devices” that can be used to
connect sustainability innovations to markets (Boons & Lüdeke-Freund, 2013). The
major idea behind this denition is that innovations such as eco-products or services
for poor people hold a particular sustainability potential that will only be realised if
the innovation in question is successfully marketed – eco-cars will only help mitigate
environmental degradation if they are used by a large number of people, i.e. when
the mobility market is transformed by truly sustainable alternatives (Schaltegger
et al., 2016b). While eco-designers are concerned about the cars’ performance,
business model developers are concerned about how to market them. Both tasks
are interrelated, but require quite different perspectives and skills.
Business model development and management deal with value propositions for
customers, supply chains, market interfaces, and nancial models (for a recent
overview of traditional business model concepts see Wirtz et al., 2016). Some
authors propose sort of guidelines to support business model developers in their
search for BMfS. We summarised these guidelines as a set of four “normative
requirements”, each addressing one of the major areas of a business model (here,
we refer to the business model concept by (Osterwalder and Pigneur, 2009))
(Boons & Lüdeke-Freund, 2013):
- The value proposition provides measurable ecological and/or social value in
concert with economic value.

59
Sustainable business models for eco-design and innovation
- The supply chain involves suppliers who take responsibility towards their
own as well as the focal company’s stakeholders.
- The customer interface motivates customers to take responsibility for their
consumption as well as for the focal company’s stakeholders.
- The nancial model allows a just distribution of costs and benets among
business model stakeholders and includes ecological and social effects.
These requirements are purposely formulated in a generic way. The idea is
not to prescribe BMfS, but to improve the likelihood that a business model
can be aligned with different kinds of sustainability innovation (this alignment
function is discussed in Lüdeke-Freund, 2013). Due to their generic quality, these
requirements should be applicable in a wide range of contexts. Major contexts are
the introduction of environmental innovations (often referring to green technologies
such as solar power), social innovations (such as inclusion programmes in supply
chains), and economic innovations (e.g. the introduction of new organisation
paradigms). These categories are of course not mutually exclusive since, for
example, social innovations can also involve technological innovations, which
might change the economics of a business.
Table 1: Major innovation orientations for BMfS (Bocken et al., 2014)
Environmental
(incl. technological)
Maximise material and energy efciency
Create value from waste
Substitute with renewables and natural processes
Social
Deliver functionality rather than ownership
Adopt a stewardship role
Encourage sufciency
Economic (incl.
organisational)
Repurpose for society and environment
Develop scale-up solutions
These orientations can be further specified (Table 1). “Develop scale-up
solutions”, for example, refers to business models that deliver ecological or social
solutions at a large scale in order to maximise the benets for the environment
and society. Scaling can be achieved through franchising or licensing, for example
(e.g. Tesla’s technology licensing). “Deliver functionality rather than ownership”
is about services that satisfy customer needs, instead of selling physical products
they have to own (e.g. Hilti’s tool leasing). The assumed effect is a decoupling of
benets for the business and its customers from physical production volumes.
As a last example, “maximise material and energy efciency” is about doing
more with less resources, waste, emissions, and pollution (e.g. Dow’s closed-loop
system “Safechem”).

The challenges of eco-innovation
60
3.
bArrIers to busIness models For sustAInAbIlIty
3.1. Barriers to BMfS
While the received literature proposes different frameworks and tools to describe
and support BMfS, little attention has been paid to the barriers that inhibit their
realisation in practice. Daily experience tells us that most companies do not employ
business models that (fully) subscribe to the above proposed normative requirements
and innovation orientations. Early on, Wüstenhagen and Boehnke (2008) identied
three major barriers to BMfS which are summarised below (for a more recent and
ne-grained analysis of barriers see e.g. (Laukkanen & Patala, 2014)).
3.2. Internalisation of external effects
The reduction of negative ecological and social effects expected from sustainability
innovations does not necessarily translate into private benets for the rm and
its customers. What is the immediate customer benet of a solar installation?
It reduces CO2 emissions, but what is the private benet for users of green
power? While conventional technologies often cause ecological and social costs,
sustainability innovations are designed to reduce these negative effects. This, in
turn, can lead to relatively higher nancial costs, if narrowly measured, and, at
least in the short term, to competitive disadvantages (think of the early days of
renewable energies, or the current situation of most e-mobile manufacturers).
3.3. Capital intensity and long lead times
Developing new technologies, such as fuel cells, requires large investments – and a
lot of time. Their nancial amortisation usually takes longer than with established
technologies and it can even be unpredictable due to insufcient forecasts of cost
and revenue proles. Early adopters have to bear the costs and inconvenience of
switching to new technologies, e.g. due to a lack of charging infrastructures for
e-mobiles, and its initially higher purchasing and running costs. Both investors
and users are important nanciers of sustainability innovations, but both might
have reasons to wait until others bore the initial costs – a prisoner’s dilemma.
3.4. The power of incumbents
Existing companies invested large amounts of money in developing, marketing,
and improving their offerings, valuable assets, technologies, and infrastructures.

61
Sustainable business models for eco-design and innovation
They often hold strong positions in the market and they are reluctant to change
their current businesses before these are fully exploited. Hence, incumbents have
a vital interest to inhibit change. While this might call for radical system-level
change, e.g. to completely replace conventional energy supplies, incremental
change can accumulate until a tipping point is reached. The German energy
industry has reached this tipping point after more than thirty years in which
renewable energies, smart technologies, and programmes to change the behaviour
of energy users were under development or kept in niches.
3.5. Overcoming Barriers with Business Model Innovation
Wüstenhagen and Boehnke (2008) also made general suggestions how to
overcome these barriers through value proposition and supply chain design and
new nancial models. Tools to support according business model innovations are
emerging in both academia and business practice (these are not further discussed
here; see e.g.( Foxon et al., 2015; Joyce et al., 2015; Upward & Jones, 2016)).
3.6. Value proposition
The value proposition of a BMfS should translate societal benets at least
partly into private benets for customers, i.e. the societal benet of an offering
must be tangible for the customers who pay for it. Proper value proposition
design can help justify the relatively higher costs of green or social offerings.
Additional private benets can be created for example through distinguishing
product features. Tesla’s e-mobiles are designed to attract high-income customers
whose willingness to pay for a premium vehicle is used to nance Tesla’s dynamic
product and organisation development.
3.7. Supply chain
Wüstenhagen and Boehnke argue that supply chains and networks should
combine carefully selected in-house activities, such as R&D, manufacturing, or
distribution, with outsourcing of non-core activities with high additional costs
and low marginal benets for the rm. Not doing everything in-house reduces
investments and allows focusing on those parts only that must be developed anew.
Combining new processes, products, and services with standard parts of third-
parties not only reduces R&D costs but also makes sure that the innovation in
question is at least in part compatible with existing production and consumption
systems.

The challenges of eco-innovation
62
3.8. Financial model
Purpose-driven patient investors and public funding with a long-term horizon
are crucial to secure the basic funding for sustainability innovation projects. As
argued above, investment needs can be reduced by focusing on particular core
activities. Investments can be divided among several investors, e.g. through co-
operations with incumbents who co-nance the scale-up and roll-out of a new
business model. From a customer perspective, low switching costs and upfront
costs are crucial, e.g. through all-in service fees, leasing or contracting models.
4.
rIversImPle: desIgnIng An ecosystem For e-cArs
4.1. Riversimple’s Eco-Design
Welsh car designer Riversimple (based on information published on http://
riversimple.com, as of March 2015) develops a new type of hydrogen-fuelled e-car
that tries to circumvent the limitations of the automobile industry’s traditional
designs and related lock-ins, such as its dependence on the oil industry and large-
volume manufacturing models (see Wells, 2013b, for a reection of sustainability
innovation in the automobile industry). Riversimple aims to combine high
standards in design and engineering. Only the most recent technologies and
materials are used to develop a highly efcient car driven by a hydrogen fuel cell
and super capacitators (fast charging energy storages). Strong and lightweight
materials are used for the body, mainly carbon bres, four in-wheel motors move
the car, and regenerative braking reduces energy losses (Figures 1a and 1b).
The car’s components are aligned with the requirements of low-powered
hydrogen fuel cells since Riversimple’s eco-design builds on two principles that
are inspired, inter alia, by the works of Amory Lovins.
Figures 1a and 1b: Early design studies of Riversimple’s “hyrban” prototype (2010)

63
Sustainable business models for eco-design and innovation
4.2. Design principle 1: Decoupling energy provision for accelerating
and cruising
This principle allows using a small fuel cell, in terms of capacity, for cruising,
while fast charging super capacitators provide the energy to accelerate the car.
Instead of using a big, heavy, and costly fuel cell for both cruising (low energy
demand) and accelerating (high energy demand), separating the energy provision
for these two processes allows for a more efcient fuel cell design.
4.3. Design principle 2: Mass decompounding
The principle of mass decompounding opens up a virtuous circle based on using
a decreasing amount of components and overall mass, and accordingly decreasing
energy use. Fewer components lead to less weight, which leads to less energy
consumption and a smaller fuel cell and engine, which in turn reduce the car’s
weight and so forth.
4.4. Riversimple’s Business Model (in the Making)
While Riversimple’s design principles address the “eco-design question” the
company is also working on the “business model question”. Riversimple’s
eco-design approach is a means to revise traditional automobile design and
manufacturing, and thus the root cause of many negative effects on the natural
environment and human health. The company’s idea for a new business model –
which is still under development – is equally radical as it seeks new ways to create
multiple forms of value for the company’s various stakeholders in an integrated
manner. Some business model properties are evocative of Better Place and Tesla
Motors (e.g. fee-based revenue model, open source philosophy) while some are
unique (e.g. distributed local manufacturing based on replicating small-scale
facilities).
4.5. Value proposition
The value proposition describes the benets a company promises its customers
and further stakeholders based on the products and services it offers. Riversimple’s
value proposition can be sketched as follows:
- Affordable and aesthetic eco-mobility for everyone;
- Car for urban trafc and daily commuting;

The challenges of eco-innovation
64
- No ownership due to an all-in leasing fee;
- Individual mobility as hassle-free service.
4.6. Supply chain
The supply chain, the backbone of any business infrastructure, shall build on
a network of local small-scale manufacturers offering locally produced cars for
local use. Another characteristic is the public availability of design details:
- Manufacturing network based on local, small facilities (5,000 cars/year);
- Open source philosophy, design details openly available as CAD les;
- Sale-of-service model along the supply chain;
- Team of engineers, designers, and business developers with professional
backgrounds (e.g. Formula 1, Fiat, Porsche Holding).
Riversimple plans to offer its e-cars, for which the company will retain ownership,
and related services mainly through local distribution networks:
- Local provision of locally manufactured cars;
- Local refuelling network;
- Riversimple retains car ownership.
4.7. Financial model
The economics of this model still have to be tested, but some general features are
already described on Riversimple’s website. The model builds on dedicated and
specialised nanciers and an attractive monthly fee for future customers:
- Investments from patient seed and venture capital providers (Bscope,
investment arm of Piech-Nordhoff family, former shareholders in Porsche)
- Monthly all-in leasing fees as major revenue source
- Fees cover the car, fuel, maintenance, and insurance
Figure 2 summarises the most important business model features according to
current publications by Riversimple. It must be considered that their model is
currently under development and still needs renement and validation.

65
Sustainable business models for eco-design and innovation
Figure 2: Overview of Riversimple’s planned e-car business model
4.8. Conclusion
Riversimple’s approach to designing a new kind of hydrogen-fuelled e-car is based
on the co-development and co-evolution of a whole ecosystem: the company
develops a new technological artefact, the e-car, and anticipates the networks that
are necessary to produce and use it, although developing these networks goes far
beyond car design in a narrow sense. While other car developers mainly focus on
their cars, Riversimple works on the parallel establishment of different networks: a
local manufacturing system, a refuelling infrastructure, and a stakeholder network
as part of the company’s governance system. On top of that, a new business model
carrying these technological and organisational innovations is under development.
Its central theme is to offer an aesthetic form of individual eco-mobility to everyone.
This business model for eco-mobility faces several barriers. How can Hugo
Spowers and his team motivate customers to contribute to the reduction of negative
environmental and social externalities, i.e. how to offer eco-mobility and private benets?
The central idea is to offer eco-mobility as a hassle-free, all-in, fee-based service
that might appeal to a broad range of customer segments. How does the company
try to overcome the problem of capital intensity and long lead times, i.e. how to
nance R&D over a long period of time? Riversimple found patient and purpose-driven
investors to nance the development of its e-car and its market introduction. The
most challenging barrier, however, is the power of incumbents, i.e. how to overcome the
lock-in effects and path dependencies of one century? One way of dealing with this barrier
is to create a network of allies who can contribute or even replicate Riversimple’s
model in the future without belonging to the original company. Riversimple’s
transparency, non-exclusivity, open source philosophy, and its dedicated network

The challenges of eco-innovation
66
approach might become the nexus of a future movement of which climax might
be a global e-car revolution.
Finally, which innovation orientations are contained in Riversimple’s business
model draft? Obviously, maximise material and energy efciency, as can be found in
the car’s light-weight construction, high-efciency fuel cells and engines. The
model is also about delivering functionality rather than ownership since Riversimple
plans to own the cars while users pay all-in fees. The company’s open access and
network approach as well as the plan to design locally replicable manufacturing
units suggest that the company is aiming to develop scale-up solutions. Whether this
combination of innovation orientations in Riversimple’s business model for eco-
mobility will allow for a sustainable business is a question for future research.
5.
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6.
About the Author
Florian Lüdeke-Freund
Florian Lüdeke-Freund is a Senior Research Associate at the
University of Hamburg, Faculty of Business, Economics and
Social Sciences, and a Research Fellow at Leuphana University’s
Centre for Sustainability Management (CSM). He obtained a
PhD in Economics and Social Sciences for his cumulative thesis
on “Business Models for Sustainability Innovation: Conceptual
Foundations and the Case of Solar Energy”. His main research interests are
sustainable entrepreneurship, corporate sustainability, and innovation management
with a particular focus on business models. Florian publishes regularly journal
articles, book chapters, conference papers, and research reports on these and further
issues. His article “Business Models for Sustainable Innovation” (2013), together
with Frank Boons, is one of the top ten most read articles of the Journal of Cleaner
Production. Together with Stefan Schaltegger and Erik Hansen, he co-edited a
special issue of Organization & Environment on “Business Models for
Sustainability” (2016, Vol. 29, No. 1). In 2013, he launched the collaborative
platform www.SustainableBusinessModel.org as a hub for academic and practically-
oriented research. Florian is currently involved in various research and transfer
projects dealing with sustainable business models, such as a review and synthesis
report for the international Network for Business Sustainability (NBS).