Business Models within the Waste-To-Energy Industry : An investigation of the methods used to create, capture, and deliver value; and the influence that stakeholders have upon a firm’s business model

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Business Models within the Waste-To-Energy Industry

An investigation of the methods used to create, capture, and deliver value; and the influence that

stakeholders have upon a firm’s business model

Authors: Krister Svensson Joel Jern

Tutors: Veronica Gustafsson Magdalena Markowska

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Acknowledgements

We would like to thank our advisor Veronica Gustafsson for her incredible support and inspiration throughout the semester. Her advice and guidance has been an important element to the success of this thesis, and we are greatly appreciative for all that she has done for us. Also, we would like to thank Magdalena Markowska for her motivation and assistance in helping us to write the best thesis possible.

We would also like to thank all the employees from Jönköping Energi AB (Ulrika Gotthardsson, Fridolf Eskilsson), Statkraft Varme AS (Arvid Wisløff ), Vestforbrænding (Marcus Müller), Jönköping Rådus AB (Björn Söderlundh), Trondheim Municipality (Hans-Einar Lundli), and Copenhagen Municipality (Søren Nielsen) who volunteered to be a part of this investigation. Their insight and perspective was vital to the success of this thesis, and we are very thankful for their time and help.

Finally, we would like to thank our family and friends for their tremendous support, and we are deeply grateful for having them in our lives.

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Krister Svensson Joel Jern

Jönköping International Business School 2011-05-23

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Master Thesis within Business Administration

Title: Business Models within the Waste-To-Energy Industry Authors: Svensson Krister; Jern, Joel

Tutors: Gustavsson, Veronica; Markowska Magdalena Date: Jönköping, May 23rd 2011

Keywords: Business Models, Waste-To-Energy, Stakeholders, Institutional Theory

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Abstract

Background: Waste-to-energy is currently at the forefront of clean technologies. It consists of the burning of different types of wastes (solid, liquid, gaseous) that provide heat and electricity. With high efficiency levels in energy production (80-90%) and low flue gas emissions, this type of energy production has quickly spread throughout Europe. In addition, laws created by both the EU and national governments have created new agendas regarding landfill and waste disposal.

Problem: We have identified three different problems that currently exist: (1) the lack of academic literature which explores specifically business models within the renewable energy industry and the potential that business models possess in exploiting the opportunity within the market place; (2) which methods are effective within a business model in achieving the value that a firm wishes to create, capture, and deliver; (3) current academic literature does not provide enough understanding of the influences and pressures that stakeholders place upon shaping a firm’s current/potential business model.

Purpose: The purpose of this investigation is to examine the business models used by three different waste-to-energy firms in Denmark, Norway, and Sweden and to identify the methods used to create, capture and deliver value. Moreover, we aim to identify and investigate the stakeholders within the waste-to-energy industry of these three companies with the goal of explaining the influence and pressures they place upon the firm’s business model through the use of institutional theory.

Method: Qualitative study done through multiple case studies

Conclusion: The three waste-to-energy firms place greater emphasis upon the method of industry specific business model design. In addition, the firms are greatly influenced by stakeholders through coercive and normative pressures.

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1. Introduction

Clean energy technologies are an important issue for the future. As outlined by Pernick and Wilder (2008, p.2) “Clean tech is bringing unprecedented opportunities for wealth creation, high-growth career development, and innovative solutions to a range of global problems”. Clean technologies have become an important strategy to be able to guarantee economic competitiveness in the future (Pernick and Wilder, 2008). Pernick and Wilder (2008, p.2) define clean technology as “any product, service, or process that delivers value using limited or zero nonrenewable resources and/or creates significantly less waste than conventional offerings.” Waste-To-Energy is one of these clean technologies.

The technology behind Waste-To-Energy produces a combination of heat and power. In combined heat and power plants, electricity and heat are generated at simultaneously. This is an easy and energy efficient way to incinerate different kinds of waste (fuels); solid, liquid and gaseous. Most plants built today are using some sort of solid fuel, and waste is one of them. But regardless of what fuel they use, these plants are far more efficient than traditional power plants and they do it with improved environmental performance as well. (Silveira, 2001)

In a conventional condensing steam power plant, the steam is condensed after it has expanded through the steam turbine. This process leads to almost a 70% of the primal thermal energy being lost. The electricity efficiency rate therefore only reaches around 30-40%. However, in today’s combined heat and power plants, the efficiency level is around 80-90%. This is because the technology has the capability of recovering much of the heat that comes from the steam (Silveira, 2001). The general principle behind waste-to-energy can be described in a simple form: combined heat and power plant can be seen as an enormous pressure cooker (Svensk fjärrvärme, 2011). The combustion takes place in a steam boiler and the heat produced is transferred to water in tubes inside the boiler. This makes the water boil and generate steam. The steam then drives turbines, which in turn drives generators that create electricity. The remaining steam is used to heat up water that is used as district heating to heat our homes (Jönköping Energi AB, 2011a).

Europe is leading the way within the Waste-To-Energy sector, especially in Denmark, Sweden and Germany (Witkin, 2011). Today about 400 waste-to-energy facilities are operating around Europe, with 29 alone operating in Denmark (Lott and Wogan, 2010). One of the major reasons for why Europe is so prominent in this Waste-To-Energy field is because of the EU regulations placed upon its member states regarding landfill issues (one of these laws severely restricts the creation of new landfill sites in countries). These countries also have binding commitments to reduce their carbon dioxide emissions by 2012 and the EU have set up climate targets for year 2020. Overall, many of these reasons have accelerated the development Waste-To-Energy throughout Europe (Rosenthal, 2010).

1.2 Problem

The renewable energy industry offers great potential to a variety of businesses that seek to establish a strong position within the marketplace. With a growing concern surrounding the current global economic and political issues on the use of fossil fuels and nuclear energy, the potential that renewable energy has to offer has been thrust into the spotlight. This potential includes clean and sustainable energy sources, a decrease in the release of harmful emissions

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and global warming, and most importantly great business opportunities for investors, established firms, and start-ups. These business opportunities within renewable energy give rise to the question: how can a firm successfully develop a product and/or service that can bring about this shift from fossil fuels to clean energy? One factor can be the development of a successful business model.

Business models are currently being used in a variety of ways throughout numerous industries, e.g. e-business, technology, aviation, etc. However, there are a range of issues when it comes to business models (both from a theoretical and practical perspective) that have yet to be clarified or even investigated. These include (1) the lack of academic literature which explores specifically business models within the renewable energy industry and the potential that business models possess in exploiting the opportunity within the market place, (2) which methods1 are effective within a business model in achieving the value that a firm wishes to create, capture, and deliver, and (3) current academic literature does not provide enough understanding of the influences and pressures that stakeholders place upon shaping a firm’s current/potential business model.

Therefore we chose to investigate business models within the waste-to-energy industry in Sweden, Norway, and Denmark because of the industry’s current successes; its potential for helping to identify factors for the development of effective and sustainable business models; and for its ability to give a deeper understanding to how stakeholders may influence a business model because of the industry’s strong ties to their local municipalities, governments, policy makers, customers, etc.

1.3 Purpose

The purpose of this investigation is to examine the business models used by three different waste-to-energy firms in Denmark, Norway, and Sweden and to identify the methods used to create, capture and deliver value. Moreover, we aim to identify and investigate the stakeholders within the waste-to-energy industry of these three companies with the goal of explaining the influence and pressures they place upon the firm’s business model through the use of institutional theory.

1.4 Research Questions

From this purpose we have developed the following questions to help specify our investigation:

• How do firms in the waste-to-energy industry in Sweden, Norway, and Denmark define value?

• What method(s) in their business model do waste-to-energy firms use in Sweden, Norway, and Denmark in creating value?

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Definition of method: “(1) : a systematic procedure, technique, or mode of inquiry employed by or proper to a particular discipline or art (2) : a systematic plan followed in presenting material for instruction” (Merriam-Webster Dictionary, 2011)

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• What method(s) in their business model do waste-to-energy firms use in Sweden, Norway, and Denmark in capturing value?

• What method(s) in their business model do waste-to-energy firms use in Sweden, Norway, and Denmark in delivering value to customers?

• Who are the stakeholders within the waste-to-energy firms in Sweden, Norway, and Denmark?

• What type of relationship do the stakeholders have to the waste-to energy firms in Sweden, Norway, and Denmark?

• How do these relationships with stakeholders influence the business models of waste-to-energy firms in Sweden, Norway, and Denmark?

1.5 Perspective

The problem will be determined from the energy producer perspective by working with specific waste-to-energy firms in Sweden, Norway, and Denmark. Also, the perspective of one stakeholder (the municipalities that the waste-to-energy firms operate within) will be investigated.

1.6 Definitions

Institutional Isomorphism

• Based upon previous work from within the social science field by Hawley (1968), Powell and DiMaggio (1991, p. 66) define isomorphism as “a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions”.

• Powell and DiMaggio recognize two types of isomorphism; competitive and institutional. The authors focus more upon the institutional aspect because of its ability to portray a better picture of the modern world of organizations (Powell and DiMaggio, 1991). Where competitive isomorphism may focus more upon the gathering of customers and resources, institutional isomorphism also takes into account “political power and institutional legitimacy, for social as well as economic fitness”, and is considered useful for “understanding the politics and ceremony that pervade much of the modern organizational life” (Powell and DiMaggio, 1991, p. 66).

2. Frame of Reference

2.1 Introduction

Current business model theory offers an overwhelming amount of variety and perspectives. With previous researchers having tailored their definitions of business models to fit their studies (with only a few overlapping in certain areas) there has yet to be developed an accepted theoretical foundation that would allow for the development of further research (Zott et al. 2010). Moreover, this lack of consensus among research has given rise to multiple interpretations and perspectives (Zott et al. 2010). Examples include the business model being

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described as a statement, description, representation, architecture, a conceptual tool or model, a structural template, a method, a pattern, and a set (Zott et al. 2010). However, throughout this investigation we have embraced this diversity in perceptions and instead see all major works from the past decade contributing a fundamental perspective that is important in the understanding and creation of business models. From our theoretical research, we believe that the primary function of any firm’s business model is centered upon the notion of value creation, value capture, and the delivery of that value. This idea is illustrated in Figure 3.1 (below). It is worth noting that value delivery is deeply intertwined within the way a firm creates and captures value (e.g. a firm can create value in the way it delivers it product). However, for the sake of a clearer empirical investigation, we define it as a separate unit of analysis in the model. The various functions of the business model all interrelate, with any change in one function affecting the other i.e. if a firm changes in the way that they create value, this in turn will affect the way the firm delivers and captures value, and vice versa.

Figure 3.1 - Primary functions (A) of a business model (B.M.)

However, the methods used by a firm when creating, capturing, or delivering value is where current research becomes unclear in which technique is the most appropriate and effective, i.e. does a firm achieve value creation through the use of strategy, innovation, reinvention, etc.? Based on this ambiguity, we chose to adopt part of the definition of a business model created by Morris et al. (2005, p. 727), agreeing that part of a business model consists of “an interrelated set of decision variables” in achieving the desired value. We see these interrelated decision variables as different methods (techniques, approaches, etc.) firms may use (alone or unison) in achieving value creation, capture, and delivery. Based on previous academic research within business models, we believe that these methods within a firm’s business model include (1) business model reinvention, adaptation and innovation; (2) strategic management of business models; and (3) industry specific business model design (in this case, the waste-to-energy industry). A unique combination of these methods could help to achieve a sustainable competitive advantage in a firm’s value creation, capture, and delivery.

VALUE CREATION (A) VALUE CAPTURE (A) VALUE DELIVERY (A) BUSINESS MODEL (B.M)

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Additionally, these three methods are similar to the core functions of the business model (creation, capture, and delivery of value) in the sense that they all interrelate and share similar qualities. Identifying them as three separate units helps bring clarity to the empirical investigation. Building upon Figure 3.1, Figure 3.2 (below) illustrates the second step in how we interpret the function of a business model:

Figure 2 – Secondary function of a business model; the method(s) a firm may use in achieving the primary function (noted as “A”)

A firm may create different versions of a business model depending on the combinations of methods used. Moreover, these combinatory methods may be created, in part, to the type of value the firm is trying to create, capture and deliver. Based upon our research of business models, we see value being primarily defined in relation to the stakeholder it is being created for. For example, if a up firm has received investments from venture capitalists; the start-up’s initial business model will be tailored to creating returns for those investors. From this, the value created from the business model is the returns the start-up generates for the venture firm. While we do recognize that value is relative to the firm, we see that the stakeholder(s) of that firm having the greatest capability in shaping a business model and the overall value that the firm plans to create, capture, and deliver. This notion is built upon Zott et al. (2010, p.17) understanding of stakeholders, who acknowledge that “the total value created is the value created for all business model stakeholders”. Overall, we believe value is defined through the power balance established between the stakeholder(s) and the firm’s business model. It is here that we also chose to investigate this ‘power-balance’ further; the relationship between the stakeholder and the business model.

A

BUSINESS MODEL REINVENTION, ADAPTATION, & INNOVATION (B) STRATEGIC MANAGEMENT OF BUSINESS MODELS (B) INDUSTRCY SPECIFIC BUSINESS MODEL DESIGN

(B)

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While business models are very operational and idiosyncratic, they are also very much influenced by the stakeholder and their relationship to the firm. A business model will always be influenced (knowingly or unknowingly) by a stakeholder, whether it is a customer, investor, municipality, government, etc. As outlined in section 3.5 of this chapter, this is the case within the renewable energy industry. Based upon the previous models (figures 1 and 2) we attempt to develop it further by illustrating the stakeholder’s potential influence upon the firm’s business model (Figure 3.3). Figure 3.3 illustrates the identification of stakeholders that influence the business model. Moreover, the arrows between the stakeholder and the business model illustrate whether the relationship is one-way (stakeholder influences business model, yet is not influenced by it) or two-way (stakeholder influences business model, and is influence by it).

Figure 3.3 – Identification of stakeholders (C) that influence the business model (B and A) Based upon our standpoint of how stakeholders can influence (and be influenced by) a firm’s business model, we chose to investigate this phenomena further by examining stakeholder theory. Current literature within business models does acknowledge the existence of stakeholders in relation to a firm’s business model (Voelpel et al. 2004; Johnson, 2010; Teece,

C

_C

BM A

B

A A

B

C

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2010) yet there is currently a lack of business model literature that describes the types of influence that they have upon the model. Examining stakeholder theory in relation to business models is important because it helps to bring greater clarity to the variety and types of actors operating within a firm’s external environment. Further, by applying stakeholder theory, it helps firms to understand (1) the business implications that stakeholders have upon their business model; (2) it can help firms to understand the feasibility in business models when catered to different stakeholder groups; and (3) can provide the possibility in gaining a better knowledge in the power balance between business models and stakeholders.

To help better explain this relationship between stakeholders and a firm’s business model, we examine institutional theory to help explain these relationships and clarify the types of influence they may have upon the firm.

2.2 Value Creation, Capture, and Delivery

2.2.1 Value Creation

Amit and Zott’s (2001) examination of the sources of value creation within the e-business industry has aided in the fundamental understanding and importance of business models within firms and industries today. Through the analysis of numerous fundamental theoretical perspectives from entrepreneurial and strategic management literature, it is here that the business model is seen as “unifying construct of analysis that captures the value creation arising from multiple sources” (Amit and Zott, 2001, p. 494-495). These sources (or drivers) of value creation are identified as: Efficiency (e.g. reduction in information asymmetries), Complementarities (e.g. bundling of goods and services), Lock-in (e.g. loyalty programs and transaction safety), and Novelty (e.g. innovation) (Amit and Zott, 2001). These sources of value creation are mutually reinforcing through their ability to enhance the effectiveness of each other (Amit and Zott, 2001). Moreover, the business model as a unit of analysis possesses a wider scope than the specific firm “since it encompasses the capabilities of multiple firms in multiple industries” (Amit and Zott, 2001, p. 514). The model as a whole possesses the ability to define how participants enable transaction and how value is created (Amit and Zott, 2001). What is important to note is the distinction between a firm’s business model and revenue model, where the business model is commonly confused as a way for generating revenues (Amit and Zott, 2001). While the business model and revenue model are “complementary yet distinct concepts”, a business model “refers primarily to value creation whereas a revenue model is primarily concerned with value appropriation” (Amit and Zott, 2001, p. 515).

Shafer et al. (2005) also recognize the business model as a tool for creating and capturing value. The ability for a firm to create value successfully is connected to the way it differentiates itself to its competitors (Shafer et al., 2005). Differentiation is achieved through the management and application of its core competencies and capabilities, and or, in the way it secures capital to fund these value creating core capabilities and competencies (Shafer et al. 2005). Moreover, value creation within a business model is correlated to the way a firm interacts within its value network, with emphasis upon the unique relationships it has established with suppliers, partners, and customers (Shafer et al. 2005). According to Morris et al. (2005), the sources of value creation lie within the differentiation of decision variables a firm must make when establishing a business model. These decision variables consist of

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components such as a firm’s value proposition, the customer, and the internal processes and competencies (Morris et al., 2005).

Johnson’s (2010) interpretation of a business model is defined as an illustration of how a firm creates and delivers value to the customer and company. Here, Johnson’s (2010) business model framework consists of 4 different elements: a Customer Value Proposition (CVP), and Profit Formula, and Key Resources and Key Processes. Within this framework, it is the CVP that “describes how a company creates value for a given set of customers and at a given price” (Johnson, 2010, p. 24). The CVP is achieved through an in-depth analysis and identification of an un-met customer need or demand, which is then turned into a product or service for a given price (known also as an offering) (Johnson, 2010). According to Johnson (2010), a CVP requires strong communication between both the customer and the company.

2.2.2 Value Capture

The second core feature of a firm’s business model is its ability to capture value. According to Teece (2010), a firm’s business model must possess the ability to deliver and capture value simultaneously. Capturing value can come in many forms, e.g. increased market share, revenue, customer loyalty, long-term service contracts, increase in firm knowledge acquisition, etc.

Chesbrough and Rosenbloom (2002) examined the issue of value capture through business models by investigating early stage technology. From their investigation, they saw the business model as a “focusing device that mediates between technology development and economic value creation” (Chesbrough and Rosenbloom, 2002, p. 532). Furthermore, successfully commercializing technology must be matched with specific business models so as to provide and create revenue (Chesbrough and Rosenbloom, 2002). This mediation between technological characteristics and economic output can be achieved through a better understanding of the functions of a business (Chesbrough and Rosenbloom, 2002). Some of these functions include (1) defining the structure of the value chain within the firm, (2) estimating the cost structure and profit potential, (3) describing the position of the firm in the value chain

Understanding the structure of a value chain can help identify how a firm plans to deliver it product or service, and also, appropriate the value captured from that delivery (Chesbrough and Rossenbloom, 2002). Shafer et al. (2005) state (based on Hamel’s 2000 interpretation of business models) that value creation and capture is based upon the “unique” relationships a firm establishes within its value network. According to Shafer et al. (2005), it’s the role the firm plays in this value network and the relationships it creates that are critical elements of the firm’s business model.

When estimating the cost structure and profit potential of product or service created, Johnson (2010, p.24) defines value capture occurring within a firms profit formula, which “defines the way the company will capture value for itself and its shareholders in the form of profit”. This profit formula includes a revenue model, a cost structure, a target unit margin, and resource velocity (Johnson, 2010).

Teece (2010, p. 184) also offers a framework (Profiting from Innovation framework) by which innovating firms can capture value from technology. Teece (2010) offers two ‘extreme’ models that can help firms capture value. The framework provides the necessary information

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on how a firm should design their business model, how to select business models based upon the innovation, and provides awareness on value chain configuration (Teece, 2010). Teece (2010, p. 184) outlines these frameworks as (1) an Integrated Business Model (innovating firm bundles innovation and product together - assumes the responsibility for the entire value chain), (2) Outsourcing (Pure licensing), and (3) Hybrid approaches (“outsource manufacturing; provide company owned sales and support”).

2.2.3 Value Delivery

As outlined previously in the theoretical literature, value delivery is strongly integrated into how a firm creates and captures value. Amit and Zott (2001) state that an example of a driver of value creation lies in a firm’s complementarities and efficiency (both examples of value delivery). Chesbrough and Rosenbloom (2002) and Shafer (2005) agree that value capture can come through how a firm acts within its value chain (another avenue for value delivery). We believe that Johnson (2010) provides a clear definition of how a firm delivers value from its business model: from its key resources and key processes. Johnson (2010, p.25) states that these key resources and key processes are “the means by which the company delivers value to the customer and itself”. They include “critical assets, skills, activities, routines, and ways of working that enable the enterprise to fulfill the CVP and profit formula in a repeatable, scalable fashion” (Johnson, 2010, p. 25).

2.3 Business Model Reinvention, Adaptation, and Innovation

For a firm to achieve successful value creation, capture, and delivery, they must be willing to reinvent, adapt, and or, be innovative when it comes to their business model. These types of changes are necessary to keep up with the dynamic and constantly changing environments (Voelpel et al., 2004). Revising a business model can help maintain viable strategies and additionally provide disruptive competitive advantages (Voelpel et al., 2004). However, simply reinventing or innovating a business model is not as easy as it may seem. According to Johnson (2010), many people do not have a strong understanding of what a business model is, nor would they understand when, how, or why to change it. Based on previous work by Moore (1993) and Tucker (2001), Voelpel (2004) states that reinvention is necessary due to two specific reasons: (1) firms no longer work in a single industry, but across a range of industries, and (2) competitor imitation is unavoidable.

One way of achieving business model reinvention, adaptation, and innovation can be achieved through an internal firm process with shared working environments, where diverse viewpoints and ideas are obtained from both employees throughout the organization and the stakeholders connected to the firm (Voelpel et al., 2004).

A second technique for achieving business model reinvention, adaption, and innovation can be achieved through a better understanding of a firm’s external environment. As Voelpel et al. (2004, p. 268-269) states, business model reinvention and adaptation comes from “making sense of socio-cultural dynamics and opportunity gaps, reinventing customer value proposition(s), and reconfiguring the business network and its value chains”. Johnson (2010) sees these opportunity gaps as the process where firms identify new customers and markets to serve, and where new customer value propositions (CVPs) are developed along with new business models to meet those new demands. Teece (2010, p. 187) states that the successful

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reinvention or creation of CVPs comes from the “understanding of some ‘deep truth’ about the fundamental needs of consumers and how competitors are not satisfying those needs”. A third approach to reinventing, adapting, or innovating business models can be achieved through co-development partnerships with other firms (Chesbrough & Schwartz, 2007). According to Chesbrough and Schwartz (2007, p. 55), these types of partnerships “embody a mutual working relationship between two or more parties aimed at creating and delivering a new product, technology, or service”. These types of partnerships can be effective in creating innovative business models options “that can significantly reduce R&D expenses, expand innovation output, and open up new markets that may otherwise have been inaccessible” (Chesbrough & Schwartz, 2007, p. 55). Successful partnerships are achieved through shared objectives, understanding what capabilities are necessary to achieve those objectives, the successful alignment of business models, and discussions of futures collaborations.

Voelpel et al. (2004) explain that business model reinvention does not necessarily mean “cannibalizing” existing firm models, but instead places more emphasis upon experimentation through systemic strategic management. This can be achieved by evaluating ones new “provisional” business model against the “current state of the business ecosystem” and predicting its evolution (Teece, 2010, p. 189). So long that business model reinvention can establish “relevant new customer value propositions, as well as sensible value for all value chain stakeholders, companies can achieve new bases of sustainable competitive advantage in today’s fast changing business environment” (Voelpel et al., 2004, p. 273-274)

2.4 Strategic Management of Business Models

Business models can quickly become transparent and easy to imitate by competitors, and firms must strategically manage internal characteristics and create sustainable competitive advantages to avoid this from happening (Teece, 2010). In order to create these sustainable business models, the use of a strategic analysis filter is necessary (Teece, 2010). These steps include (1) Market Segmentation, (2) the creation of a CVP for each segment, (3) the design and implementation of mechanisms to capture value from each segment, and (4) the implementation of ‘isolating mechanisms’ to hinder or block imitation by competitors, and the disintermediation by customers and suppliers (Teece, 2010). These “filters” enforce strategic analysis that help business models avoid imitation, create differentiation, establish sustainable business models, and help create barriers for incumbents (Teece, 2010). Examples of what strategic management of business models can achieve include “systems, processes and assets that are hard to imitate”, a “level of opacity….that makes it difficult for outsiders to understand in sufficient detail how a business model is implemented”, and potential reluctance by competitors to imitate “if it involves cannibalizing existing sales and profits or upsetting other important business relationships” (Teece, 2010, p. 182).

Business model strategy not only involves the protection of internally designed models, but also the identification of new opportunities to go after. George and Bock (2011, p. 99) define the business model as the “design of organizational structures to enact a commercial opportunity”, where “the business model develops in parallel with the entrepreneur’s knowledge and resource base as the organizational structures are developed that will ultimately create value by exploiting the underlying opportunity”. These specific organizational structures that allow for these entrepreneurial activities to occur include (1) the resource structure (“the static architecture of the firm’s organization, production technology, and core resources leveraged to serve customers”), (2) the transactive structures (the

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organizational configuration that determines key transactions with partners and stakeholders”), and (3) the value structure (“the system of rules, expectations, and mechanisms that determine the firm’s value creation and capture activities”) (George & Bock, 2011, p. 99)

2.5 Industry Specific Business Model Design

The final method that businesses can use to achieve value creation, capture, and delivery is through the design of business models based upon the specific industry that they operate in. For this section, we examine business model literature that stems from the renewable energy industry.

Wustenhagen and Boehnke (2008) have identified three areas that have limited new firms from commercializing within the renewable energy market: (1) environmental externalities, (2) high initial capital intensity and long lead-times, and (3) the power of incumbents. Environmental externalities deal with the current debate between the private vs. public benefits of renewable energy technologies (Wustenhagen & Boehnke, 2008). While an introduction of these renewable energy technologies may create a public benefit through a reduction in usage of fossil fuels, it may not “necessarily translate into reduced private cost for the consumer, because the environmental externalities of conventional energy systems….are not fully internalized in market prices” (Wustenhagen & Boehnke, 2008, p. 86). Based on previous literature by Villiger et al. (2000), Wustenhagen and Boehnke (2008) describe that a firm can overcome this challenge through the creation of a new value proposition that places greater emphasis upon the private benefits (on top of the public benefits) and unsolved customer needs.

A second approach that Wustenhagen and Boehnke (2008) highlight is a properly configured value creation which can help overcome the high initial capital costs and incumbent challenges. Firstly, in order to avoid high initial capital costs, firms should focus on the components that are critical to their competitive advantage and outsource larger parts of their value chain (Wustenhagen & Boehnke, 2008). Secondly, partnering or co-operating with other firms can help businesses to avoid one-on-one competition with incumbents (Wustenhagen & Boehnke, 2008).

A final approach that can help firms deal with the specific challenges within the renewable energy industry would be through the creation of innovative revenue models (Wustenhagen & Boehnke, 2008). These revenue models could include: (1) renewable energy firms offering their renewable energy technology through new leasing and contracting methods to customers, (2) a greater focus on after-sales services to generate profit, and (3) a better use of available subsidies.

2.6 Stakeholder theory as a tool for understanding the power balance

and relationships within Business Models

Examining stakeholder theory in relation to business models is important because it helps to bring greater clarity to the variety and types of actors operating within a firm’s external environment. Moreover, by applying stakeholder theory, it helps firms to understand (1) the business implications that stakeholders have upon their business model; (2) the feasibility in

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business models when catered to different stakeholder groups; and (3) provide the possibility of gaining a better knowledge in the power balance between business models and stakeholders.

Stakeholder theory, defined by Freeman (2010, p. 48), is seen as “(t)hose groups who can affect or are affected by the achievements of an organization’s purpose”. This definition is seen by Fassin (2009, p. 116) as a combinatory version that includes “two dichotomous views” – a claimant definition and an influencer definition. While a variety of definitions have been built upon Freeman’s original version of stakeholder theory, for the purpose of this investigation, we chose to use Fassin’s (2009) definition of stakeholders which has been divided into three different categories: stakeholders, stakewatchers, and stakekeepers. These three groups are classified as consisting of “internal constituents and stakeholders who have a real stake in the company, the pressure groups that influence the firm, and the regulators who impose external control and regulations on the firm” (Fassin, 2009, p. 121). According to Fassin (2009), real stakeholders are defined as those who “possess a legitimate claim, power, and influence” which the firm has a responsibility to. Stakewatchers are seen as those who “do not really have a stake themselves but protect the interests of real stakeholders, of as proxies or intermediaries” (Fassin, 2009, p. 121). And finally, stakekeepers can be labeled as “the independent regulators, who have no stake in the firm but have influence and control” (Fassin, 2009, p. 121) Fassin (2009, p. 121) explains their role and those who enforce regulations and constraints “while the firm has little reciprocal direct impact on them”. It is important to understand how these three different stakeholder groups can potentially influence a business. Freeman (2010) classifies these influences by a stakeholder as economic, technological, social, political, and managerial. An economical effect on a firm by a stakeholder can consist of influences upon a firm’s profitability, cash flow, and stock prices (Freeman, 2010). A firm can also affect the economic “well-being” of a stakeholder by having some sort of financial stake within that particular group (Freeman, 2010). Technological effects by a stakeholder on a firm include the prevention of use of specific technologies and or a constraint on what technologies can be produced (Freeman, 2010). Social affects by stakeholders include “altering the position of the firm in society, changing the opinion of the public about the firm, or allowing or constraining what the firm is about to do with “society’s permission”. The firm may have social effects on a particular stakeholder as well by helping constraining the stakeholder to engage in certain activities, or by giving the stakeholder a “cause” to rally around” (Freeman, 2010, p. 93). Freeman (2010) states how these social effects evolve into political effects, stating how actions taken by stakeholders are undertaken to achieve some sort of social purpose. Finally, managerial effects by a stakeholder can include a firm being forced to change it’s “management systems and processes, and even its managerial style and value” (Freeman, 2010). Freeman (2010, p. 95) states that by analyzing stakeholders in this way “we can understand in more detail the cause and effect relationship between an organization and its stakeholders”.

2.7 Institutional Isomorphism and its ability to explain the relationship

between stakeholders and a firm’s business model.

As previously discussed, we believe that the business model is greatly influenced by its relationship to different stakeholders. Fassin (2009) has helped us to classify the different types of stakeholders, while Freeman (2010) has described the types of influence that stakeholders can create. But the question remains – why are business models affected by these

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pressures? We believe that institutional isomorphism can help better explain the relationship between stakeholders and a firm’s business model.

Powell and DiMaggio (1991, p. 63) have identified that the “bureaucratization of the corporation and the state have been achieved”; where bureaucracy is seen as the common organizational form and homogeneity is spreading throughout them. What Powell and DiMaggio (1991) seek to understand is why this homogeneity is occurring throughout these organizations. “In the initial stages of their life cycle, organization fields display considerable diversity in approach and form. Once a field becomes well established there is an inexorable push toward homogenization” (Powell and DiMaggio, 1991, p. 64). Different organizations are structured into specific fields (by competition, professions, or the state), and subsequently influenced by powerful forces, making them become more similar to one another (Powell and DiMaggio, 1991). As identified by Powell and DiMaggio (1991, p. 65), “organizations may change their goals or develop new practices, and new organizations enter the field. But in the long run, organizational actors making rational decisions construct around themselves and environment that constrains their ability to change further in later years.” Based on theory by Meyer and Rowan (1997), Powell and DiMaggio (1991) explain that examples of this include organizations adopting innovation not out of desired performance improvement, but instead as a way to remain legitimate within their industry. This too occurs with the adoption of strategy (Powell and DiMaggio, 1991). As outlined by Powel and DiMaggio (1991, p. 66) “(t)he concept that best captures the process of homogenization is isomorphism”. Powell and DiMaggio (1991) have identified three mechanisms through which institutional isomorphic change happens: Coercive Isomorphism, Mimetic Isomorphism, and Normative Isomorphism. Coercive isomorphism can be seen as stemming from “formal and informal pressures exerted on organizations by other organization upon which they are dependent and by cultural expectations in the society within which organizations function. Such pressures may be felt as force, persuasion, or as invitations to going in collusion. In some circumstance, organizational change is a direct response to government mandate: manufacturers adopt new pollution control technologies to conform to environmental regulations” (Powell and DiMaggio, 1991, p. 67). This form of isomorphic pressure has led to an increase in homogeneity and conformity within firms and industries, leading to the adoption of certain standards, rules, organizational forms, and rituals (Powell and DiMaggio, 1991).

Mimetic isomorphism derives from organizational imitation and modeling (Powell and DiMaggio, 1991). The underlying force of this isomorphism derives from a certain level of firm and industry uncertainty (Powell and DiMaggio, 1991). Based on theory from March and Olsen (1976), Powel and DiMaggio (1991, p. 69) describe that “(w)hen organizational technologies are poorly understood…..when goals are ambiguous, or when the environment creates symbolic uncertainty, organizations may model themselves on other organizations”. However, it is important to note that imitation and model is not always done consciously; it can also occur within a firm/industry unconsciously (Powell and DiMaggio, 1991).As stated by Powell and DiMaggio (1991, p. 70) “(m)uch homogeneity in organizational structures stems from the fact that despite considerable search for diversity there is relatively little variation to be selected from. New organizations are modeled upon old ones throughout the economy, and managers actively seek models upon which to build (Kimberly, 1980)”. Mimetic isomorphism, in its essence, is when organizations model themselves after similar organization that they see as being more successful or legitimate (Powell and DiMaggio, 1991).

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Normative isomorphism, defined by Bruton et al. (2010, p. 422-423) “represents organizational and individual behavior based upon obligatory dimensions of social, professional, and organizational interaction. Institutions guide behavior by defining what is appropriate or expected in various social and commercial situations”. This normative perspective is guided by values and norms; a standard of ‘social obligation’ that exercise influence and create a necessity to comply with (Bruton et al., 2010). The sources of this form of isomorphism, outlined by Powell and DiMaggio (1991), stems from the creation of a cognitive standards set within university education and the growth of professional networks.

3. Methodology

This section begins with the discussion of a choice in qualitative research approaches in order to best achieve the objectives of this paper. Following this, the selected research approach and strategic study objectives are discussed, leading to the choice in an inductive approach for the investigation. The selected approach will be supplemented with the use of case studies from three different countries (Denmark, Norway, and Sweden), investigating three different companies. The data collection for these case studies consist of a triangulation of data (documents, observations, interviews) with a majority of the data coming from semi-structured interviews.

3.1 Research approach

3.1.1 Qualitative research

As defined by Merriam (1998, p. 5) qualitative research can be considered an “umbrella concept covering several forms of inquiry that help us understand and explain the meaning of social phenomena”. Moreover, qualitative research is based upon “the view that reality is constructed by individuals interacting with their social worlds” and that the reason for investigating this is to understand “the meaning people have constructed….how they make sense of their world and the experiences they have in the world” (Merriam, 1998, p. 5). In our study we are investigating a social phenomenon: we aim to investigate business models within the waste-to-energy sectors in Sweden, Norway and Denmark; their approaches and techniques in creating, capturing and delivering value; and moreover, how different stakeholders influence the actual business model. We believe that a qualitative investigation is the appropriate research tool that can help cover these different forms of “inquiry”, and can give us a deeper understanding of the larger social phenomena at play when it comes to business models in the waste-to-energy industry. As outlined by Merriam (1998, p. 5) “(I)n contrast to quantitative research, which takes apart a phenomenon to examine component parts….qualitative research can reveal how all the parts work together to form a whole”. Understanding all the factors that influence the creation, capture and delivery of value within a waste-to-energy firm’s business model, in addition to the influence that stakeholders have upon these business models, will help develop greater clarity into how these different issues and factors interrelate and create a firms business model.

These issues are not as easily measured through a quantitative method. The measurement of value and the influence of stakeholders upon a firm’s business model are difficult because it is subjective and difficult to illustrate through a quantitative method. Therefore, we find that our investigation is more suited towards a qualitative study.

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An additional aspect of a qualitative investigation that we find relevant to our investigation is that the researcher is the primary instrument for data collection and analysis. From this perspective, the researcher possesses the ability to adapt and change if need be to help better conduct their investigation. Therefore, we chose to work from a qualitative standpoint throughout our investigation in case new areas of interest are encountered and change to our investigation is necessary. An additional characteristic of qualitative research that is important to our investigation is to be able to work inductively. Based upon our theoretical framework, we aim to develop new theory that can bring to light new issues in the development of business models within the waste-to-energy industry and the effect stakeholders have upon them. Furthermore, qualitative research uses words and pictures in the analysis rather than numbers to express what conclusions that have been drawn from the investigated phenomena. (Merriam, 1998)

3.1.2 Research approach choice

The selection of a research approach can provide the ability to generate a more well-designed and informed investigation. A well formulated research approach can help guide the author with strategic choices that will be relevant to the study and can help adapt the research to possible constrains. (Saunders et al., 2007)

Our research approach is similar to an inductive approach, where the goal is to develop theoretical contributions to the area of business models through the use of qualitative methods, case studies, multiple case studies, and content analysis.

3.2 Research strategy

3.2.1 The Case study approach

The use of a case study method is one of the most challenging research strategies when conducting an investigation, deriving from the need to gain a deeper understanding into complex social phenomena (Yin, 2003,). While case studies can be used in an exploratory, descriptive and/or explanatory manner, Yin (2003) argues the choice in these strategic methods is based upon two specific conditions; the type of research question(s) being asked (this includes research questions that ask “how” and/or “why” that are tailored for an explanatory purpose), and the degree of control the scholar has over contemporary behavioural events.

Yin (2003) outlines that the selection of research questions provides the greatest insight into differentiating which strategy is most appropriate for the specific study. When using an exploratory approach, Yin (2003, p.6) states that the use of “what” questions are used to “develop pertinent hypotheses and propositions for further inquiry”. On the other hand, “how” and “why” questions are more effective in conducting an explanatory study that can deal with answering questions regarding “operational links needing to be traced over time”. For our study, we chose to use a combination of both explanatory and exploratory approaches through the use of case studies; aiming to not only identify the operational links within three specific firms, but to further develop propositions for further inquiry.

The degree of control over and access to actual behavioural events can also help give clarity to which strategy to use. As outlined by Yin (2003, p. 7) “(t)he case study is preferred in

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examining contemporary events, but when relevant behaviours cannot be manipulated”. Furthermore, the use of case studies when examining contemporary events allows for the addition of “direct observation of events being studied and interviews of the persons involved in the events” (Yin, 2003, p. 8). It is for these specific reasons we have chosen a case study approach to help bring greater insight and depth to our investigation.

3.2.1.1 Different types of case studies

A multi-case study design has been selected, consisting of the examination of three different firms within the waste-to-energy industry in addition to the study of the primary stakeholders (the local municipalities of Jonkoping, Trondheim, and Copenhagen) that influence their business model. A multi-case examination would potentially allow us to contribute a deeper understanding of how business models operate and function within this industry, and moreover, the role the stakeholder plays in influencing them. Yin (2003) advocates that the use of multiple cases is preferable due to the greater chance in answering ones research questions in addition to providing greater in depth analysis through a compare and contrast approach. As Yin (2003) states, it is always better to gain analytical conclusions from two or more cases than those coming from a single one.

The second step in developing a case study is the choice between a holistic or embedded approach; both referring to the specific unit(s) under analysis. A holistic approach is an analysis of an organization as a whole, whereas the embedded approach refers to the analysis of multiple sub-groups or units within an organization (Saunders et al., 2007). In our investigation, a business model (in one aspect) represents the overall functions and operations within a firm used to assist in creating, capturing, and delivering value. Hence, the appropriate unit of analysis is the whole firm. Therefore, we find it appropriate for this study to use a holistic approach when analysing these firms in our case studies.

3.2.1.2 Case selection

Our case selection consists of the selection of three different waste-to-energy facilities within Scandinavia. These include Jönköping Energi AB (Sweden), Vestforbrænding (Denmark) and Statkraft Varme AS (Norway). The selection of these specific companies was done through a theoretical sampling, as opposed to a stratified or random sampling, due to their ability to illuminate and extend relationship and logic among potential constructs (Eisenhardt and Graebner, 2007). A more in depth analysis of each firm is conducted within the findings section of this paper.

3.3 Data collection method

3.3.1 Primary vs. secondary data

The data collection method when conducting an investigation can consist of either primary, and or, secondary data. Secondary data consists of the reanalysis of previously collected data for some other purpose (Saunders et al., 2007) whereas primary data collection refers to the gathering of information from various forms of observation and/or interviews. The preferred methods for primary data collection are discussed in the next section.

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In this investigation both primary and secondary data have been collected. The secondary data collected consists of academic articles regarding the development of energy policies in Sweden, Norway, and Denmark; newspaper articles, magazine articles, academic articles, and books on current issues within on business models, the renewable energy, and energy industries; and brochures and internet material provided by the investigated waste-to-energy firms on the history of their company. The secondary data is used to provide a general outline of the current issues surrounding this industry and a historical background of business models in the background section of this paper, and a more in depth historical background of the firms is provided in the findings section.

The primary data collected, which lies at the foundation of our study, consists of interviews conducted with the three different waste-to-energy companies (Jönköping Energi AB, Vestforbrænding and Statkraft Varme) and their primary stakeholders (their local municipalities: Trondheim, Jonkoping, and Copenhagen). These interviews are supported with secondary data provided by the firms and stakeholders.

3.3.2 Preferred data collection method when conducting Case studies

Yin (2003) states that there a six different sources of data collection (each one considered relevant) when using a case study method. They include interviews, direct observations, participant-observation, physical artifacts, archival records, and documents (Yin, 2003). One is not considered to be superior to another, and instead can be considered complementary (Yin, 2003). However, Merriam (1998) states that when a qualitative research is being conducted, most of the primary data is collected through interviews. Additionally, Saunders et al. (2007, p. 139) discuses that to strengthen the quality of a case study, multiple sources of evidence are necessary; hence the “data collection techniques employed may be various and are likely to be used in combination”.

In our investigation, we use a triangulation of data method collection techniques to strengthen our findings and theoretical contributions. This triangulation is achieved through the use of multiple investigators, interviews, interviews with different companies in different countries, direct observations (only done in Sweden), secondary data, and interviews with waste-to-energy stakeholders (representatives from the municipalities that they operate within)

3.3.2.1 Interviews

As stated previously, an important source of information gathering when using a case study approach is accomplished through interviews (Yin, 2003). Interviewing is necessary when one cannot observe behavior, feelings or people’s interpretation of the world (Merriam, 1998). It can be however difficult when selecting which type of interview to conduct. There are two main types of qualitative interviews: semi- structured and unstructured/in depth (Saunders et al., 2007). A semi-structured interview consists of a previously devised list of topics and questions that the interviewer wishes to cover. This type of interview provides room for the interviewer to ask the question in the order he sees fit in to help maintain flow of the conversation, in addition to allowance for follow-up question to bring clarity to the topic at hand. Unstructured (or in-depth) interviews are more informal than semi-structured interviews. There is no preset list of questions prior to the interview, but instead a clearly set list of topics that are to be covered in no preset order.

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During this investigation, the primary data collection consisted of semi-structured interviews with different managers from the three waste-to-energy companies. Additionally, three semi-structured interviews were conducted with the stakeholders of these companies (Jonkoping Municipality, Trondheim Municipality, and Copenhagen Municipality). Our reasoning for choosing semi-structured interviews is that it provided the ability to ask the same questions to the different waste-to-energy firms and the same questions to the stakeholders. It is important to note that two different sets of questions were created for the waste-to-energy firms and for the stakeholders (municipalities). Asking the same set of questions to both groups would simplify the organization of the findings and provide a greater ability to compare, contrast, analyze, and interpret them.

3.3.2.2 Interview objects and the interview process

Table 1. - Interview objects used in study

Date Name Company Position Duration Visit/Telephone

5/6/11 Ulrika Gotthardsson Fridolf Eskilsson Jönköping Energi AB Information manager Heat manager 2 hours Visit

5/13/11 Marcus Müller Vestforbrænding Operations Manager 1 hour Telephone 5/11/11 Arvid Wisløff Statkraft Varme

AS

V.P. of strategy, administration, & technical staff

1 hour Telephone 5/3/11 Søren Nielsen Copenhagen

municipality

Waste Planner 45 min Telephone 5/11/11 Hans-Einar Lundli Trondheim

Municipality

Energy & Climate Advisor 40 min Telephone 5/9/11 Björn Söderlundh Jönköping Municipality Vice Director Jönköping Rådhus AB 1.5 hours Visit

The choice of who to interview is an important issue when collecting data, depending primarily on (1) what the investigator is seeking to have answered, and (2) from which perspective the investigator is trying to gather information from (Merriam, 1998). For this investigation, we have chosen to interview upper management from the waste-to-energy companies in addition to interviews with representatives from the local municipalities that they operate in. The selection of waste-to-energy firms from Norway, Denmark, and Sweden was done to gain a broader perspective and understanding of their business models and how they operate. In addition, interviewing the local municipalities that the waste-to-energy firms operate in was done to (1) to gain a different perspective in how they (as stakeholders) might potentially influence the firm’s business models, and (2) was also done due to the complicated ownership structures within some of these companies. Both Jonkoping Energi AB and Vestforbænding are owned by their local municipalities (in the case of Vestforbænding, it is owned collectively by all 19 Danish municipalities), whereas Statkraft Varme AS (also once formerly owned by the municipality) is now privately owned. To keep consistency throughout the investigation, all municipalities were interviewed because of their position as being a primary stakeholder to the waste-to-energy firms. Outlined below were steps taken during the interview process with both the waste-to-energy firms and the municipalities.

In their book Qualitative Research in Practice, Darlington and Scott (2002) describe the importance of following a set of stages during an interview process. These stages include:

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finding and selecting participants, establishing a rapport, initial contact, the interview, recording, and ending. Each stage acts as an outline for the successful collection and quality level of data (Darlington & Scott, 2002).

The initial stage begins with the selection of participants (for more information about selected interview subjects see Table 1). As outlined by Darlington and Scott (2002), it is difficult to predict how many participants will be needed for the investigation, and will be best determined through a better understanding of the theoretical and practical implications. From a theoretical standpoint, the ideal number of participants will be determined by the research topic and questions (Darlington & Scott, 2002). Moreover, seeking participants with a wide range of experiences is also important to “obtain the broadest possible reach of the range of perspectives on the topic under investigation” (Darlington & Scott, 2002, p. 52). Through the aid of Strauss and Corbin (1990), Darlington and Scott (2002, p. 52) outlined this process as a ‘negative case analysis’ which helps to “add variation and depth of understand” to the investigation. Since the purpose of this study is to (1) investigate the approaches used in business models within the waste-to-energy firms in creating, capturing and delivering value, and (2) identify and explain the influence that stakeholders have upon these waste-to-energy firms’ business models, it was important to obtain as a wide range of perspectives as possible to help bring greater clarity to the investigation. Our diversity in participants range from: (1) position within waste-to-energy firms and municipalities, (2) number of participants from waste-to-energy firms and municipalities, (3) geographical location of waste-to-energy firms and municipalities and (4) ownership structure of waste-to-energy firms. However, due to practical constraints (labor intensive and time), this was the limit on how many participants could be involved in the investigation (Darlington & Scott, 2002). To identify the correct employees to conduct interviews with, e-mails were sent out to selected companies with a general description of our investigation with the idea that they could guide us to the correct person. This same process was done with the municipalities (stakeholders).

Darlington and Scott (2002) identify the second step of the interview process as establishing a rapport between the researcher and the participant. This sense of connection and/or relationship is important so that the participants feel as relaxed as possible and are able to answer the questions to the best of their ability. Participants were provided with interview guides and were able to selected the form/location of the interview (face-to-face or via telephone).

The third step involves the initial contact (Darlington & Scott, 2002). It is important to contact the interview object in advance in order to explain what the research is about and answer any potential questions that the interviewees might have (Darlington and Scott, 2002). An ongoing e-mail and telephone correspondence with all interview subjects was conducted, providing the participants the opportunity to ask questions and/or obtain further clarification on the research topic. During this process, participants were asked permission to have the interviews recorded and whether their names could be published in our study. This is important to determine before the actual interview and is a way to follow an ethical way of conducting research. (Darlington and Scott, 2002)

The fourth and fifth step included the actual process of conducting the interviews and recording. The interviews were conducted with representatives from all three waste-to-energy firms and municipalities (see Table 1 above), and an interview guide was used throughout the duration of the interview (see appendix 1 and appendix 2). All interviews were recorded, in

Business Models within the Waste-To-Energy Industry : An investigation of the methods used to create, capture, and deliver value; and the influence that stakeholders have upon a firm’s business model