Sustainable Transformation Paper Series, No 2
Prof. Dr Wayne Visser
Sustainable Transformation Lab Antwerp Management School
Innovation Pathways Towards Creating Integrated Value | 1
Table of Contents
Abstract. ...........................................................................................................................................3 Redefining Value Creation..........................................................................................................3 Introducing Integrated Value. ...................................................................................................4 Five Forces of Fragmentation. ..................................................................................................5 Five Forces of Integration. .........................................................................................................6 Five Pathways for Innovation.................................................................................................... 7 Differentiating Integrated Value...............................................................................................9 Illustrating Integrated Value. ...................................................................................................10 Implementing Integrated Value...............................................................................................11 Conclusion. ................................................................................................................................... 13 References..................................................................................................................................... 14 Declarations.................................................................................................................................. 17 Contact........................................................................................................................................... 17 Citation........................................................................................................................................... 17
Innovation Pathways Towards Creating Integrated Value | 2
Abstract
In the context of a plethora of worsening social, environmental and ethical negative conditions often associated with economic growth and industrial activity, I am proposing Integrated Value as a conceptual and practical framework for business to respond credibly and effectively as a force for innovation and solutions. In order to do so, I begin by asking: how is value to society currently being destroyed by economic activities? Taking a systems science perspective, the answer is: whenever it causes fragmentation, or disintegration. My contention is that this disintegration in society occurs in at least five principle ways, which I call the five forces of fragmentation: disruption, disconnection, disparity, destruction and discontent.
I then ask: how might this value destruction in society be countered or reversed? And I find clues in innovations that are occurring in five emerging economic spheres: the resilience, Exponential, access, circular and wellbeing economies. In each of these areas, there are breakthrough business models, practices, products and services that are building, rather than destroying, societal value. I call these the five pathways to innovation, defined in terms of the desired future state they are trying to advance, which is a society that is more secure, smart, shared, sustainable and satisfying. Four strategic value-creation options are then described (singular, focused, diffuse and integrated value) before citing illustrative cases and describing the seven steps of a methodology to implement integrated value.
Redefining Value Creation
The scale, urgency and worsening of numerous social, environmental and ethical global challenges, from income inequality and biodiversity loss to climate change and pervasive corruption, has led to prevailing concepts and practices of value creation in business and economics coming under increasing scrutiny by scholars and practitioners alike.
In particular, there is a strong call to reform incumbent business models that have done little to resolve these global challenges – and may even be argued to have caused or exacerbated the problems. Volans (2016) suggests that in order to achieve sustainability, breakthrough business models will need to be social (delivering both financial and extra-financial value through positive impacts for people—in the present and in the future), lean (optimizing the use of all forms of capital, from physical and financial through human and intellectual to social and natural), integrated (managing financial and extra-financial value creation across economic, social and environmental systems) and circular (sustaining inputs and outputs at their highest value in both technical and biological cycles).
Similarly, AMS and ING (2017) propose hybrid business models, which can be either incremental or radical. These new approaches may be seen as an attempt to respond to longstanding critiques of neo-classical, neoliberal capitalism (Hertz, 2002; Hart, 2005; Klein, 2007) and corporate social responsibility (Christian Aid, 2004; Blowfield, 2005; Visser, 2008;). For instance, I have argued previously that sustainable business models would need to embrace ‘responsible capitalism’ (based on the principles of investment, longtermism, transparency, full cost accounting and inclusion) (Visser, 2012) and ‘transformative CSR’ (based on the principles of creativity, scalability, responsiveness, glocality and circularity) (Visser, 2010).
This questioning and recasting of value has been building for a number of decades now. For example, Freeman’s (1984) stakeholder theory was largely proposed as an alternative to narrow, neoclassical economics conceptions of value creation solely in terms of shareholder returns, typified by Friedman’s (1970) contention that “the social responsibility of business is to increase its profits.” Freeman (2010) stressed that managing for stakeholders should be approached as a new business model for value creation, rather than a way of making trade offs between stakeholders.
Subsequent to Freeman, this questioning and expanding of the concept of value continued with Elkington’s (1994) ‘triple bottom line’, Kanter’s (1999) ‘social innovation’, Emerson’s (2000) ‘blended value’, Prahalad and Hart’s (2002) ‘bottom of the pyramid’ (BOP) inclusive markets and Porter and Kramer’s (2011) ‘creating shared value’ or CSV. Of course, not all of these re-conceptions have been without criticism (e.g. see Crane et al., 2014 on CSV). Nevertheless, shifting to the language of value, rather than of responsibility, is important, as is the emphasis on a more strategic and integrated focus (Visser, 2013).
Typically, all these new conceptions built on what went before, but called for greater integration and an expansion of the potential of business to make positive impacts. For example, Hart’s (1997) ‘sustainable
Innovation Pathways Towards Creating Integrated Value | 3 value’ framework incorporates pollution prevention, product stewardship, base of the pyramid (BOP) and clean tech. Emerson’s (2000) ‘blended value’, much like Elkington’s (1994) ‘triple bottom line’, looks for an overlap between profit and social and environmental targets, while Porter and Kramer’s (2011) CSV focuses on synergies between economic and social goals.
We have also seen efforts from standards bodies (King and Roberts, 2013). For example, the International Integrated Reporting Council (IIRC, 2013) published their International Integrated Reporting Framework, the International Organization for Standardization (ISO, 2014) issued guidance on integrated management systems as part of its ISO Directives (Annex SL) and the Future Fit Foundation (2016) launched their Future Fit Business Benchmark.
In addition, numerous practitioner organisations have been working on methodologies for measuring value in a way that incorporates externalities, including for examples (cited in KPMG, 2014): True Value (KPMG), B Impact Assessment, Environmental Profit & Loss (EP&L) Statement, Natural Capital Protocol (Natural Capital Coalition), Redefining Value (WBCSD), Social Return on Investment (SROI Network), Total Impact Measurement & Management (PwC) and True Price.
Introducing Integrated Value
Taking into account these trends and developments – and building on previous groundwork (Visser and Kymal, 2015) – I am proposing Integrated Value as a conceptual framework for pulling together these intellectual and methodological threads. In order to do so, I begin by asking: how is value to society currently being destroyed by economic activities? Taking a systems science perspective, the answer is: whenever it causes fragmentation, or disintegration. This is consistent with the idea that the tendency towards greater integration in nature and society is a fundamental principle of evolution (Smuts, 2013; Capra, 2014).
Hence, fragmentation is by definition devolutionary, literally causing disintegration or the destruction of complexity. Complexity in this instance does not refer to ‘complicatedness’, but rather to synergistic connection or positively reinforcing relationships, in the same way in which our brains embody complexity through its 100 billion interconnected neurons. My contention is that this disintegration in society occurs in at least five principle ways, which I call the five forces of fragmentation: disruption, disconnection, disparity, destruction and disease.
I then ask: how might this this value destruction in society be countered or reversed? And I find clues in innovations that are occurring in five emerging economic spheres: the resilience, Exponential, access, circular and wellbeing economies. In each of these areas, there are breakthrough business models, practices, products and services that are building, rather than destroying, societal value. I call these the five pathways to innovation, defined in terms of the desired future state they are trying to advance, which is a society that is more: secure, smart, shared, sustainable and satisfying.
Hence, one of the decisive factors that may tip the balance between these opposing evolutionary forces in society – in favour of integration rather than disintegration – is synergistic innovation. Table 1 summarises these tension and potentials.
Table 1: Forces of Global Disintegration, Integration and Innovation
Forces of Fragmentation
Forces of Integration
Pathways for Innovation
Disruption
Resilience economy
Secure
Disconnection
Exponential economy
Smart
Disparity
Access economy
Shared
Destruction
Circular economy
Sustainable
Discontent
Wellbeing economy
Satisfying
There is ample case-study evidence that the five pathways to innovation are creating value beyond narrow financial or economic conceptions. Viewed in terms of a multi-capital perspective, we can demonstrate that they are building – in addition to financial capital – infrastructural, technological, human, social and ecological capital. However, the real breakthrough in value creation comes when two or more of the pathways to innovation are synergistically combined, thus creating integrated value.
Innovation Pathways Towards Creating Integrated Value | 4
Let me define the concept fully before going on to describe the essential building blocks in more detail:
Integrated Value is the simultaneous building of multiple capitals (notably financial, infrastructural, technological, human, social and ecological) through synergistic innovation across the resilience, Exponential, access, circular and wellbeing economies that result in a world that is more secure, smart, shared, sustainable and satisfying.
Five Forces of Fragmentation
An emphasis on integrated value may seem obvious or even inevitable to some. After all, following decades (some would even say centuries) of globalisation and the acceleration of international trade and teledigital connectivity, the world seems more integrated than ever before (The Economist, 2013). But the globalisation trend has also masked cracks in the façade of integration, beyond the recent political trend of rising nationalism and protectionism in the Trump era (Plender, 2017).
As systems scientists remind us, any complex system exists in a state of dynamic equilibrium, which, if sufficiently disrupted will either break through to a higher state of integration, or break down into a lower state of fragmentation (Laszlo, 2014). In our world today, we feel the tension between the tendency towards integration and the counter-tendency towards disintegration. For example, if we look at the data on security risks, digital distribution, social inequality, ecological integrity and human wellbeing, we can see that there are powerful forces of disintegration that threaten global harmony and progress for all. These can be distilled into the following five forces of fragmentation in what I call the Fracture Economy (Figure 1).
Disruption – This refers to any instability that threatens human life, safety and security, and is most often associated with political conflicts, acts of terrorism, demographic disruption, industrial accidents and natural disasters. For instance, according to the Global Peace Index 2016, only 10 countries in the world can be classified as conflict free (Institute for Economics and Peace, 2016). Another example is the 65.3 million forcibly displaced people worldwide, including 21.3 million refugees and 10 million stateless people (UNHCR, 2017).
Disconnection – This refers to any form of isolation that prevents human communication and effective data sharing, and is most often associated with a lack of access to knowledge, uncensored media and information technology. For instance, 4 billion people still lack access to the internet and nearly 6 billion people do not have high-speed internet (World Bank, 2016). And nearly 2 billion do not use a mobile phone, and almost half a billion live outside areas with a mobile signal (World Bank, 2016).
Figure 1: Five Forces of Fragmentation in the Fracture Economy
DISRUPTION
Natural disasters
Industrial accidents
Market crises
DISCONTENT
DISCONNECTION
Lifestyle diseases
Lack of education
Existential crises
Digital divide
Cultural dislocation
FRACTURE ECONOMY
Technology transfer failure
The Five Forces of Fragmentation
DESTRUCTION
DISPARITY
Resource depletion
Income inequality
Biodiversity loss
Economic & social exclusion
Undermining ecosystems