Understanding (How Sustainability Fits Into) Your Business Model
What is your business model? Do your senior managers and Board fully appreciate the various elements and how they all fit together? Probably not. There are different view about what the term ‘business model’ means.
The International Integrated Reporting Councils’s (IIRC) recently released Business Model Background Paper for <IR> calls for companies to report on their business model. But it doesn’t make a strong case for it and it all seems a bit fuzzy. So what should you do?
Thinking about your business model and discussing it is a good idea. The IIRC’s paper provides some frameworks for those discussions. It is not particularly easy to navigate. It encourages companies to think of the business model as its “chosen system of inputs, business activities, outputs and outcomes that aims to create value”.
Try asking your senior team to identify your main inputs, activities, outputs and outcomes you may well find they come up with different things and certainly different priorities.
Hopefully they will at least all be thinking beyond traditional narrow concepts of business models being about how an organisation makes money. Such narrow views will not make for long term business success.
Business inputs need to be considered in terms of people, infrastructure, relationships, natural resources etc as well as funds. For example, people are critical to a professional services organisation but very often reporting focusses predominantly on financial inputs perhaps with a few statements along the lines of ‘our staff are our biggest asset’ thrown in. Companies should be able to articulate how they nurture that resource and add value to it.
Stakeholders are interested in the impact of business inputs and activities on a range of capitals. This includes the impact on the environment, employees and communities. But outcomes which can’t be measured in dollars or pounds are often seen as outside the business model. They are in fact an important part of it.
The IIRC wants companies to disclose trade-offs made between short and long term impacts and between positive and negative impacts on the capitals. Those trade-off decisions are often not consciously made. But they should be.
Such trade-offs involve value judgements. The IIRC paper does not explicitly acknowledge this. But companies should do so and report how they have sought to determine the views of their stakeholders.
Do you have a process to ensure that you give due weight to these trade-offs in your decision making? If not, develop one.
Inputs are owned by society and outcomes impact on all of us. Articulating what your business contributes to society is therefore critical to your success.
Companies need to critically challenge their understanding of the complex relationship between all of their inputs, activities, outputs and outcomes and find innovative ways of reporting on their business model.
The process should take account of stakeholder views and recognise that creating value for one stakeholder group may diminish it for another.
A challenge for companies is to articulate the connections between materiality, stakeholder engagement, the capitals and their business model better than the IIRC has done to date. It is complicated. Getting internal consensus about your business model is an important initial step.