System dynamic simulations of business model innovation

Agusta Thora Jonsdottir^1,*,+, Lara Johannsdottir¹

¹Environmental and Natural Resources, Faculty of Business Administration, University of Iceland, Gimli, Sæmundargata 2, 102 Reykjavík, Iceland.

*[email protected]^, [email protected]

Extended abstract

The current linear economy causes tremendous environmental harm (IPCC, 2021). The issues recognized are on different scales, ranging from the individual level to systemic or even existential (Cook et al., 2019; Cook & Jóhannsdóttir, 2021). As a response, nations have referred to solutions like sustainable development and circular economy. Sustainable development of businesses can be achieved either by creating positive external effects on the environment and society or radically reducing the negative effects of business operations (Boons & Lüdeke-Freund, 2013; Rockström et al., 2009; Schaltegger et al., 2012, 2016; Stubbs & Cocklin, 2008). Boulding (1966) used the metaphor of describing the earth as a spaceship, a fully closed loop system, to explain the notion of the circular economy, which can be described as a loop economy with a focus on minimizing waste or utilizing waste as raw materials for other products or processes.

An important part of the research on transforming businesses towards a circular economy and sustainable development revolves around studying business models and business model innovation. Many types of systems have evolved that follow those principles, such as cradle-to-cradle (McDonough & Braungart, 2002), industrial ecology (Graedel & Allenby, 1995), laws of ecology, (Commoner, 1972) regenerative design (Lyle, 1994), biomimicry (Benyus, 2002)  and the blue economy (Pauli, 2010). Elkington (1998) developed the Triple Bottom Line (TBL) framework to encompass the three pillars of sustainable development into a corporation´s objectives.  Corporations must perform in all three dimensions; financial, environmental, and societal to stay within the boundaries of sustainable development. Such systems, as mentioned previously, can be referred to as sustainable business models. Schaltegger et al., (2016.p.6 )define business models for sustainability as: 

“A business model for sustainability helps describing, analysing, managing, and communicating (i) a company’s sustainable value proposition to its customers, and all other stakeholders, (ii) how it creates and delivers this value, (iii) and how it captures economic value while maintaining or regenerating natural, social, and economic capital beyond its organizational boundaries.”

Theoretical lenses utilized to study such business models include business model innovation, change management, lean thinking, strategic management, and network theory (Dentchev et al., 2018). Case studies are mostly used as a research method followed by surveys, conceptual papers, and field studies, but these studies can be categorized as taking a generalist approach to the topic, a technology-centered approach, entrepreneurship, an innovation-centered approach, or a behavioral approach. There is no strong focus on a strategic approach, widening the circular business approach beyond the focus on waste, lean and green manufacturing, or on aspects such as leadership (Dentchev et al., 2018). There is a vast room for research in this field, such as by employing rigorous empirical methods to explore sustainable business models, sector-specific studies, intersection with researchers forcing on more traditional business models, and inter- and transdisciplinary studies (Dentchev et al., 2018).

System dynamics is a holistic approach developed by Forrester to study complex systems, it has two fundamental approaches, a qualitative approach creating mental models based on causal loop diagrams (CLDs) and a quantitative approach to build system dynamic model simulations (Forrester, 1995; Sterman, 2000). The business model concept allows analysis of organizational value creation on a systemic level, where activities and choices are interlinked (Abdelkafi & Täuscher, 2016; Casadesus-Masanell & Ricart, 2007; Schneider & Clauß, 2020; Teece, 2010, 2018). System dynamics have been shown to be particularly useful to explore interactions between parameters with linear and non-linear relationships, and feedback loop behaviors, that either have re-enforcing or balancing effects on performance (Ramon Casadesus-Masanell & Ricart, 2010).

This systematic literature review aims to explore how business models have been studied and simulated following the system dynamic approach. Based on the finding’s method propositions will be developed that could facilitate the process of transforming businesses towards circular economy models, thereby supporting sustainable development.

To meet this purpose, two research questions are proposed:

1)     What is known about business model innovation from using system dynamic simulations to simulate business models?

2)     How can the knowledge from system dynamic research of business models be utilized to advance the transformation of businesses towards the circular economy and sustainable development?

To answer the research questions, the paper focuses on systematically reviewing business model studies published in peer-reviewed journals in English, that have focused on business model innovation. The search databases are Scopus and Web of Science. 164 papers are currently under review. The method for the Systematic literature review follows the SALSA framework as described by Grant & Booth, (2009)   Deductive and inductive analysis is performed utilizing atlas.ti software. Preliminary findings from deductive analysis, based on the guidelines on successful use of system dynamic modeling (Sterman, 2000, p. 89), show that conceptualization of the business model is a part of most studies, and either real problem-solving (Abdelkafi & Täuscher, 2016; Cosenz, 2017; Cosenz & Noto, 2018) or hypothetical problem-solving (Cosenz et al., 2020; Cosenz & Noto, 2018; Franco, 2019; Yun et al., 2019). The purpose of the models is either exploratory or empirical guidance. The main benefactors of the studies are business owners, policymakers, and managers. The field of system dynamic simulations of business models is emerging, as the studies found are from the period between 2016-2023. Many different sectors are being  explored, including innovation for professional writing (Cosenz & Noto, 2018),  the financial sector (Abdelkafi & Täuscher, 2016), car industry (Yun et al., 2019), apparel sector (Cosenz et al., 2020), utilities (Castaneda et al., 2017; Laws et al., 2017) and high tech (Yun et al., 2019).  Most studies originate in Europe, with Italy with the highest number of studies but also Germany, UK, Sweden, and Switzerland. Studies from USA, Columbia, Taiwan, Korea and Brazil are also seen. As an empirical approach, majority of studies is based on the case study method. The models are built on macro and micro cases, in equal amounts, the micro case is a single business unit, while the macro case is either on industry level or country level.

Preliminary inductive findings show that oftentimes the system dynamic simulations identify the importance of delays in responses for those business models under study (Abdelkafi & Täuscher, 2016; Roci et al., 2022; Yun et al., 2019). The findings show that system dynamic simulations provide a deeper understanding of the dynamics between strategy, operations, and different structure and their performance on key performance indicators for the organisation (Cosenz et al., 2020; Maresova et al., 2022).

Many papers focus on Reconfiguring dynamic capabilities, like business model innovation as a competitive advantage (Abdelkafi & Täuscher, 2016; Asif et al., 2016; Cosenz, 2017; Tauscher & Abdelkafi, 2018) and redesigning product service system to narrow resource use (Franco, 2019) or test different business strategies, like adopt a stewardship role (Costanza, 2023),  maximizing material and energy use (Cosenz et al., 2020; Cosenz & Bivona, 2021; Laws et al., 2017; Yun et al., 2017), substitute with renewable energy sources (Castaneda et al., 2017; Laws et al., 2017), deliver functionality rather than ownership (Asif et al., 2016; Cosenz et al., 2020; Cosenz & Bivona, 2021; Cosenz & Noto, 2018; Costanza, 2023; Yun et al., 2017), testing different business model structures (Yun et al., 2017, 2019), or repurpose for society or the environment (Asif et al., 2016; Cosenz et al., 2020; Yun et al., 2019). In summary preliminary conclusions indicate that system dynamic simulations of business models for sustainability provide greater insights into the nature of business models and the dynamics between value creation, value proposition, value delivery, and value capture (Bocken et al., 2014; Richardson, 2008) and how these interact and influence performance, which can be measured in ecological, social and or financial dimensions.  The data for the contribution from each model, has not been combined and categorized.

This research contributes towards an improved understanding of sustainable business model implementation and strategy. It benefits business owners and policymakers in implementing sustainable development.

Keywords 

Systematic Literature Review, Business model, System dynamic, Circular economy, Sustainable development 

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