Disruptive innovation and sustainable development

Posted on by Bart Doorneweert

When companies work on sustainability they are rarely inclined to contemplate the structure of their current business model. Any action related to sustainable development needs to fit within their current system of activities. Changing the model to become more sustainable is usually not worth the investment in the short and medium term, and is thus not pursued. Rather, companies prefer to work on incremental changes to improve on sustainability where they can, steering well clear of the root of the problem which lies in the impact that flows from their current business model design. What is the reason that companies seem so unwilling to opt for radical change, even if it were for the better? With this blog I would like to share some thoughts.

Value networks determine which business models apply
Part of the answer is revealed through Clayton Christensen’s theory of disruptive innovation and the role value networks play. A value network comprises of interdependent value chain actors, from sourcing to marketing. This network of actors is pieced together to provide for the product or service features, which are defined by carefully listening to customer demand (which ultimately closes off the value network). The value network is thus the context within which the firm responds to customers’ needs.

All activities by each member in the value network, are geared to deliver on the requested product features as efficiently as possible. A value network knits all the different business models of all the participating value network members together. In practice the interrelations can be so strong that the composition of a value network is formed as a hierarchy which mirrors product or service architecture.

This value network is visualized by Christensen as a nested system, where each part of the value chain fits into another one like a Matryoshka doll (original can be seen in the Innovator’s Dilemma, 38-39). I’ve made a slight alteration to Christensen’s figure by drawing out one for the agricultural system, changing its shape to show how different uses, or purposes for the use of agricultural production [food, non-food, fuel] shape the hierarchy of a value network.

If you consider the value network of local food, then you are dealing with something totally different than when you’re looking at value network that belongs to conventional agriculture. It’s just not possible to take out one part of the value network you don’t like (eg. lack of scale in local food distribution), and replace it with a bit that you do like from another system (large distribution from conventional agriculture). Most companies are thus “locked” in their interdependent value network, and couldn’t change their business model to become more sustainable even if they wanted to.

Christensen describes this impossibility very well by analogy to the components of computers, where components belonging to the mainframe computers (physically) can’t fit into the architecture of the mini computer. Both technologies, even though the same in nature, belong to very different value networks. The upshot is that value networks can only keep innovating along the same line of improvement of those business models that befit their network. This is what Christensen calls sustained innovation. It could provide part of the explanation of why companies usually prefer to stick to incremental change when it comes to sustainable development.

Value system order determines how business models deliver on sustainability
Through disruptive innovation it is possible to challenge existing value networks and replace them with new networks with new business models. However, you often see that these disruptive business models are no guarantee that business will deliver on sustainability.

In order to understand why value networks, even though they can be disrupted, will rarely changes in terms of delivery on sustainability, we need to consider a second value system layer: one which expresses the overall order of values which permeate throughout the value network. Let’s call this value system order. I have taken the liberty to use the figure below to depict value system order, taken from the MIT Sloan Management Review. Again, the value system order is a nested system. Ideally the sustainable value system order consists of a well-proportioned spacing between the values of economy, society, and the environment like the one below.

 

If the value order prioritizes economy over the environment, like for instance in conventional agriculture, the order will look different, something akin to the next figure on the left. Any choice made for business model innovation in this order of values will result in this proportion of delivery on sustainability, regardless of whether we’re talking about sustained innovation, or disruptive types. If you look at the design order of a contrary example, a national park or reserve, then sustainability will look something like the figure on the right. The choice here is always for models which take lots of environment into consideration, link to society but more limitedly so, and the economics of it all is quite negligible.

The main point is that the value system order provides guidance for the designing the hierarchy that you want to implement in the actual value network that operates the value chain. Each value system order will result in a corresponding set of value system hierarchies and business models, which deliver on sustainability according with the proportion of the order.

Redesign of value system order and the value network makes or breaks sustainable development
If you look at the relation between the role the value network plays in business model innovation in combination with the value order proposition, we can now argue why existing industry finds it so difficult to deliver on sustainability. They might be willing to reconsider the value order (commiting themselves to sustainability covenants, like the World Business Council for Sustainable Development), but they soon find that they are not  ready or able to disrupt their own value network with a different network design hierarchy that will deliver on sustainability in line the with desired value order.

So what might be the alternative? Though still a budding sector, the alternative might lie in the social entrepreneurship sector. Social entrepreneurs practice innovation alchemy, where new business models are designed from an uncompromising value order perspective, but fully flexible in the design of the corresponding value network. This article in Forbes explains along these lines how social entrepreneurs are hacking capitalism. In practice you will find that social entrepreneurs are using their alchemy in an attempt to disrupt incumbent value networks, and replacing them with more sustainability oriented ones.

Regardless of the promise of social enterprise, sustainable change in any case, even from incumbent industry, will need come from the same process. This is a process where firstly a clear sustainable value order is chosen, through which new value network hierarchies are consequently designed that are able to challenge the old capitalist system. Combining both will create the type of disruptive innovation which is needed to transform an industry’s practice to a more sustainable design.

Take away points:

–       incumbent firms are often locked in value networks that prevent them from innovating towards more sustainable business models

–       disruptive innovation does change value network designs, but they are no guarantee in themselves for sustainable development

–       sustainable market transformation will more likely come from companies that adopt well-balanced priorities between economy, society, and the environment, and accordingly create scalable and replicable business models that are able to disrupt an industry’s status quo

–       it is more likely that those companies will be social enterprises than existing multinational publicly listed enterprises.

Mosquitoes, Snakes, and Sector Specific Startup Accelerators

Posted on by Bart Doorneweert

A perfection of means, and confusion of aims, seems to be our main problem.
Albert Einstein

Last week I was fortunate to visit Leancamp (a masterful gathering of people exchanging on startup methodology and experience). I was curious to learn for myself whether there would be any advantage or added value that sector specific knowledge could have in supporting startup development. Generic accelerator programs seem to be more prevalent in the startup ecosystem, but could it just be that there is a niche for sector specific focus?

In the series of scheduled Leancamp events, I attended an excellent session by @tor on the idea generation process. Tor’s discussion was on using discovery and ideation in the startup development process. His open-ended question was whether it would be better to use many ideas to come to a notion of killer game changing ideas, or whether singular ideas would work better, focusing efforts on making one, or a few things work.

Though there was of course no real answer to this question, the session did succeed in its’ outset to prompt my thinking on sector specific acceleration. I serendipitously linked back to a story told to me by my former Zameen Organic co-founder, Gijs, in India about the problem he had with snakes. Through this link I was able to better frame the advantages, which sector specific accelerators could bring to shaping and selecting ideas for customer problem solving.

It’s a snake eat frog world out there
The story Gijs told me a few months ago was about a problem he was having with snakes entering his home in India’s rural Auroville, located near Pondicherry. The snakes we’re talking about here are not just benign pests: we’re talking about one of the most venomous creatures that crawl this earth, the common krait (click on pic below). Nothing you really need to have hanging out with your kids.

Initially Gijs believed that the snakes were looking for refuge at his home from the scorching (> 45 degrees Celsius) heat of the sun. But he soon found his hypothesis debunked when he observed that snakes, amongst which the krait, mostly entered during the evening and at night time (always check what’s under your sheets before nesting in for the night!!)

Correlated with the observation that the snakes moved in a lot at night, was another the observation that there were also frogs hopping around the house. This brought up a second hypothesis: are the snakes coming in for the frogs? Indeed they were. In fact, kraits love feeding on frogs.

The question was now: what are these frogs doing here? The answer to that had the same structure as the previous question: the frogs hopped inside to get a bite to eat. They were enjoying the mass of mosquitoes that was humming around in house, and had been bothering Gijs and the family for quite some while. So at this point Gijs had some notion of a problem hypothesis, and also a starting point where to go from to finding a solution: the mosquitoes. If you take away the reason why frogs are in the house, then you probably take away the motive for snakes to visit.

So any guesses as to what Gijs did about the source of mosquitoes? The quick fix solution would be to grab for the spray can. But Gijs being an eco-minded agronomist, and an avid systems thinker, didn’t see the appeal to this fix, nor the long-term resolve it would bring. Rather, Gijs aimed for the source. He found the source in the pond next door, which was squirming with larvae but contained no fish. So, as an experiment, Gijs set out fish in the pond, hoping they would feast on the larvae, and reduce the incidence of mosquitoes. The fish did indeed solve the mosquito problem, and the predicted chain of causality set in, drastically reducing the incidence of frogs and snakes in the house.

And the specific point being…
Last week‘s Leancamp session was excellent. I advise any aspiring and seasoned entrepreneur to attend and share knowledge at future events. I remain in amazement of the power that the methods of leanstartup and customer development bring to help markets smartly solve part of the world’s major problems. Although these tools help you to frame any real world problem and devise related solutions, they could definitely be supported with knowledge from people who know both the methodology, as well as hold experience in certain corners where the problems are occurring. In my case this would be agriculture’s corner. I would say there could be two advantages:

1) Sink your teeth in the right problem.
The first point is that understanding the part in the order of the system you work with is highly beneficial. If you don’t, you would probably have started off with developing snake traps (snakes being the most terrifying facet of the problem), and move further down that line if that didn’t work. This could probably take you to the real solution at some point, but it would have taken you much longer to get there. We all know the pressure startups need to work under to build things faster than their peers to compete. So sector specific knowledge could help you to build faster through better targeting.

2) Don’t give up too easily on your solution.
The second point is that specific knowledge could help affirm your direction in tinkering with your prototype solutions. Gijs had a great one shot hit through introducing the fish, but this could also have just as likely been a wrong hypothesis. If the fish wouldn’t have worked then, Gijs, with his background, would have started working on another solution for the mosquitoes, concluding that the fish was the wrong hypothesis, but at the right level. However, if he didn’t have the systems understanding, he could also be tempted to conclude (falsely) that the more simple solution would be to start at a different level of the problem chain; on something that ousts-the-frogs-to-oust-the-snakes. So in other words you could say that sector specific knowledge could help to improve the direction of your pivot, should you ever need to perform one.

Now these are just hypotheses, but I’ll work diligently over the coming time to validate them by helping agri-startups to focus their aim.