User:Sustainability2011/Sandbox

Sustainability innovation is the creation of new market space, products/services, and processes driven by social or environmental sustainability issues. The necessary innovations are technological but also “soft” innovations in social practices, financing and business relationships. Sustainability innovation is considered to be radical rather than incremental as ground-breaking technological or system change is needed to achieve the goals of sustainable development. It is driven by both supply- and demand-side factors, and government policy is acknowledged to be an important determinant. Sustainability innovation is hindered by path dependence and lock-in effects, market failures and the inherent uncertainty of the innovation process. Corporate commitments to sustainability-driven management are strengthening as companies recognize that sustainability is a major driver of innovation. Lead users can adopt central roles in sustainable innovation processes.

Definition
Sustainability innovation can be broadly defined as innovation that makes a positive contribution to sustainable development. More specifically, it is the creation of new market space, products/services, and processes driven by social or environmental sustainability issues. Unlike eco-innovation, or environmental innovation, sustainability innovation comprises not only the ecological, but also the economic and social dimensions of sustainability. While environmental innovation focuses on new or modified processes, systems and products that avoid or reduce environmental degradation, the effects of sustainability innovation can also be economic and social improvements such as changes in productivity, employment or income distribution. The usage of the term “sustainability innovation” is ambiguous as it can be understood in several ways. It can be interpreted as innovation directed explicitly at a sustainability goal, as innovation processes which try to adhere to sustainability targets during product development, production and use but do not have sustainability issues as their primary target, or as innovation processes not linked to environmental or social goals which are sustainable within the company meaning that it keeps its innovation engine running profitably.

Steger et al. (2004) point out that both terms “sustainability” and “innovation” are poorly defined but endowed with positive connotations as they are often used to mean “problem solvers” showing a way out of crises where an immediate course of action is not obvious. Furthermore, in the literature the term “sustainable innovation” is often used with the same meaning as “sustainability innovation”. It is helpful here to note the subtle but important distinction Belz and Peattie make between “sustainable” and “sustainability” marketing. The adjective “sustainable” can be used to mean durable or long-lasting (as in the third interpretation above) whereas “sustainability innovation” shows a more explicit relation to the sustainable development agenda.

Technological and Social Sustainability Innovations
Much existing literature on innovation has taken a particularly technological/functional viewpoint as to what sort of new products and processes are to be considered innovations. All research traditions recognize that technological innovation must contribute to the development of a new model of growth and regulation of the economy and that it plays a key role in transforming the present production system into a more sustainable one.

Innovative technologies, however, are invented, developed, and marketed in an environment that consists not only of markets, supply chains, and distribution networks but also of the social, political, and cultural conditions prevailing in the prospective markets. The necessary sustainability innovations will not all be technological, since in many markets sustainability will require “soft” innovations in social practices, financing and business relationships.

For sustainability innovation to take place, there must be dialog between the innovators and the stakeholder groups whose cultural and political realities may not be prepared to accommodate innovation. Companies working in areas of research and development of technologies which have high potential to affect human society should find ways to explore societal reactions to these technologies even before they reach the market.

Sustainability Innovation as Radical Innovation
Innovation is one of the central determinants of structural change. According to their impact on structural change, two types of innovation can be distinguished: lower impact, incremental innovation which introduces small improvements in an already established technology or social structure, and high-impact, radical innovation (Schumpeter’s Basisinnovation) which causes sudden, far-reaching changes of the status quo (discontinuous development).

Sustainability innovation is considered to belong to the second type as it is increasingly acknowledged that focusing on incremental innovation along an established trajectory is not sufficient to achieve the goals of sustainability and radical technological or system change is needed. New technological paradigms arising out of radical (breakthrough) innovation are more likely to offer innovative solutions to existing sustainability issues as they have a much bigger learning curve potential compared to incremental modifications of mature technologies approaching the end of their learning curve.

Radical approaches to sustainability innovation can be presented as a series of eco-efficiency curves, or innovation “waves”, each of which generates increasing levels of eco-efficiency and system change, as follows: incremental product improvement followed by product redesign, function innovation and, ultimately, system innovation which transforms the entire system of production and consumption. Here, product improvement implies existing products are being adjusted and improved. Product redesign implies  components  of  the  product  are  developed further or replaced by others. Those two levels focus on only products. On the  other  hand,  function  innovation  aims  to substitute  dematerialized  services  for  products,  and  system innovation  implies  that  new  products  and  services  arise, requiring changes in the related infrastructure and organizations.

Drivers
Ashford outlines three drivers of the rate and direction of technological change from a firm’s perspective: willingness to change, opportunity to change, and capacity to change. A firm’s willingness to change is determined by the organizational and managerial attitudes towards changes in production technology as well as by its knowledge of possible technological changes. Opportunity to change is subject to both supply-side and demand-side influences corresponding to the technology push and market-pull drivers in the innovation literature. On the supply side, an important factor is the gap between the technology available to the firm and that which can be adopted through diffusion, adapted through incremental improvement or developed in-house in a process of radical innovation. Demand-side factors pulling companies towards change are government regulation which generates demand for sustainable products, potential cost savings or profit increase for the firm from cleaner production, consumer or public demand for safer products and production methods, and worker pressures. A firm’s capability to change can be increased by development or transfer of knowledge about sustainable production alternatives and by improving its skills base.

Government policy to stimulate innovation can occur both on the supply and the demand side. Measures such as government-sponsored R&D, support for education and demonstration projects reduce the private cost of generating innovation (technology push). Actions such as government procurement, regulatory standard setting and intellectual property protection increase the profitability of successful innovations (demand pull).

Del Río provides an overview of the empirical literature on the drivers and barriers to the innovation and adoption of environmental technologies. As he concludes, most studies show that companies prefer to adopt end-of-pipe technologies rather than clean technologies and incremental clean technologies improvements are usually adopted with preference to radical clean technologies. Furthermore, many studies find that the success of a particular environmental technology depends strongly on government policy although there are exceptions.

From the techno-institutional perspective
Successful innovation and take up of a new technology depends on the path of its development, so-called "path dependence". Society's choices, and the preferences that inform them, are path dependent, meaning that choices we have made in the past affect current preferences and options, and the choices we will make now and in the future. As a result, we may become "locked in" in the sense that certain options that might have been possible or even likely, if we had made different choices in the past, may no longer be feasible or desirable. This idea of path dependence or "lock-in" has been applied most frequently to technologies, since they both influence and are influenced by the social, economic and cultural setting.

Since modern technological systems are deeply embedded in institutional structures, Unruh introduces the notion of a Techno-Institutional Complex (TIC), to capture the idea that lock-in occurs through combined interactions among technological systems and governing institutions. A technological system is an inter-related set of components connected in a network that includes physical, social and informational elements. For such a system, lock-in is intensified by network externalities (network effect) arising from systemic relations among technologies, infrastructures, interdependent industries and users. These positive externalities, which act to reinforce the dominance of the system, arise because both physical and informational networks grow in value to users as they become larger and more interconnected. In addition, institutions evolve to reinforce the technological system, both in terms of formal rules, such as regulatory structures, and informal constraints, such as codes of behavior.

For instance, Unruh argues that current carbon-based energy and transportation systems in industrialized countries form locked-in techno-institutional complexes, hence the term carbon lock-in. The electricity generation TIC forms an example where institutional factors, driven by the desire to satisfy increasing electricity demand and a regulatory framework based on reducing unit price, feed back into expansion of the technological system, most recently by rapid building of gas-fired power stations. In the UK, regulatory drivers to promote the expansion of renewable energy, including the Non-Fossil Fuel Obligation from 1990 to 1998, and the Renewables Obligation since April 2002, have not so far been strong enough to overcome this carbon lock-in. In part, this is because other institutional drivers have acted to reinforce the advantage of current large-scale centralized generators. For example, NETA (the New Electricity Trading Arrangements), introduced in April 2001, designed to correct perceived imperfections in the wholesale electricity market, has reduced prices, but also reduced the output of smaller generators. In addition, connection charges are higher for decentralized generation technologies, such as Micro combined heat and power (micro-CHP), which connect to local distribution networks, rather than national transmission systems. Similarly, hydrogen-based systems, which some have promoted as the long-term alternative to carbon, face regulatory barriers in terms of perceived safety concerns, and lack of incentives for companies to create the large-scale infrastructure which would be needed. In such ways, institutional factors act to reinforce the lock-in of the current carbon-based technological system.

From the firm's perspective
Well-documented market failures exist in the case of low-carbon innovation, which cause firms to invest less in R&D relative to the socially optimum level: the positive externality or knowledge spillover effects of R&D, and the negative externality from pollution (or both of them occurring in a joint market failure). Knowledge spillover diminishes private incentives for R&D as private firms cannot fully capture the value of their investment in R&D, part of which spills over to other parties, e.g. technology producers and users. If private firms and individuals do not pay the external costs of environmental damage, there is little demand for pollution abatement technologies and therefore low incentives for firms to invest in developing them. Another barrier to sustainability innovation is the increasing returns to already established technologies due to network effects, learning-by-doing and economies of scale.

An observation with important implications is that technology development is an inefficient process. It is also one that is difficult if not impossible for central authorities to direct successfully. First, technology is not free. Technology must be deliberately induced at cost to the innovators. The costs are high because of the high failure rate of new innovations. Second, history points to a very low success rate of centralized efforts in regard to technology planning. Because uncertainty and experimentation are inherent to the process, successful technology development depends heavily on decentralized decision-making structures and processes of information exchange. Markets and informal information networks among technology suppliers and users are important to the processes of weeding out inferior technologies, selecting superior alternatives and learning how to improve these. Studies of technological change repeatedly stress the importance of the firm as the key organizational entity in carrying innovation forward. Nonetheless, it has been found that radical solutions rarely arise from firms with existing interests in the same market. Radical innovations are, instead, most often introduced by firms new to the market or by new constellations of firms. Moreover, while firms are the key organizational entities, the process of developing new solutions involves interactions between demand and supply, technology producers and users, private and public R&D and knowledge and competencies internal and external to the firm.

Sustainability Innovation as a Corporate Strategy
The most prevalent approach to sustainability taken by companies has been to treat it as an issue of corporate social responsibility without incorporating its principles in the company’s core business processes. However, corporate commitments to sustainability-driven management are strengthening according to the results of a survey on sustainability and innovation conducted in 2010 among business executives. 54% of the respondents considered pursuing sustainability-related strategies necessary for their companies to be competitive. 32% of the organizations had developed a clear business case for addressing sustainability whereas for 62% sustainability was found to be a permanent issue on top management’s agenda. The greatest benefits to companies in addressing sustainability were found to be improved brand reputation, reduced costs due to energy efficiency and increased competitive advantage. Instead of being a burden on the company’s bottom line, sustainability begins to be seen as a source of competitive advantage, which should therefore be treated as a frontier for innovation. Nidumolu et al. (2009) propose a five-stage process for companies to become sustainable:

1. Viewing compliance as opportunity for innovation – Companies gain a substantial first-mover advantage by complying with the most stringent environmental standards and participating in shaping emerging norms that have not been officially enforced yet.

2. Making value chains sustainable – Corporations save costs by introducing operational innovations throughout the supply chain which lead to greater eco-efficiency, i.e. increase energy efficiency, reduce emissions and generate less waste. Particularly useful in this regard are tools such as life cycle assessment. The social-ecological impact matrix provides an idea of the major problems of a product along its whole life cycle from cradle to grave. On the one hand, the impact matrix visualizes the social and environmental 'hot spots' of a product. On the other hand, the 'hot spots' open up new market opportunities. The impact matrix is therefore a starting point for sustainability innovations and a useful tool for new sustainable product and service development.

3. Designing sustainable products and services – At this stage firms can gain advantage over their competitors by developing sustainable offerings or redesigning existing ones. Belz and Peattie define sustainable products and services as “offerings that satisfy customer needs and significantly improve the social and environmental performance along the whole life cycle in comparison to conventional or competing offers”. Skilled sustainability branding is of crucial importance when launching sustainable products to make sure that they are not perceived by consumers as “greenwashing”.

4. Developing new business models – The next challenge for companies on the way to sustainability is to find novel ways of capturing and delivering value. To do this, companies can explore how they can meet customers’ needs differently by providing them with solutions rather than products and how partners can enhance the value of their offerings. New business models have the potential to change value-chain relationships significantly.

5. Creating next-practice platforms – At this stage, company executives look beyond a single market and begin to question the assumptions behind doing business today through the lens of sustainability. The goal is to innovate by changing existing paradigms, for example by synthesizing business models and technologies to develop cross-industry platforms that will allow managing energy and resources in radically different ways.

User Perspectives
Users can play a significant role both in generating sustainability innovations and in their further development and diffusion. Success or failure of the the whole innovation process will depend on how the users accept the product or service and whether they want to participate in the development of this new product or service.

Following Eric Von Hippel, many companies nowadays are starting to implement this strategy of use-oriented innovations. According to Carillo-Hermosilla et al. “users may be the first to develop many new industrial and consumer products”. Therefore companies can get a great stimulus to “eco-innovate” using the market-pull strategy from their customers “who are other actors in the supply chain”. The lead user methodology, introduced by Eric von Hippel in 1986, helps to identify and involve progressive users in the generation and development phases of sustainability innovation. Two main aspects are identified that help to distinguish between the “lead” users and “ordinary” users: 1) lead users are the first ones to identify new needs; 2) lead users are highly motivated to engage in new product development.

The lead user methodology can be expanded by focusing on sustainable lead users. A study by Diehl and Schrader states that “…aiming at accelerating sustainable consumption, innovations of products and services in the field of sustainability have to meet or even exceed existing standards concerning usability, convenience, affordability and amortization”. Sustainable innovations could develop a great potential to educate socially and environmentally responsible generation of consumers and give an opportunity to companies to act on highly competitive markets. Consumer citizens qualify themselves very much - with regards to their capabilities and basic motivation - as sustainable lead users who can adopt central roles in the invention, introduction and diffusion phases of sustainable innovation processes and act as role models and opinion leaders in their surroundings in the context of sustainability.