Business Behaviour Change
The design of policy interventions for resource efficiency and the circular economy has been dominated by a “resource based view of the firm”. This undervalues the socio-technical drivers of organisational and business behaviour as well as the potential biases that influence business decision-making.
In this context, behaviour refers to how an organisation makes decisions, how these are influenced by factors such as socio-technical system, organisational culture and structures but also biases at the cognitive level of decision makers.
Given the recent insights emerging from the behavioural sciences literature with regards the cognitive dimensions of decision making there has been a clear desire to apply these insights across a range of contexts e.g. individual decision making, organisational behaviour.
While this is understandable there is also evidence from the literature that the application of these approaches may not be as readily applicable to businesses and other types of organisations so policy makers need to proceed with caution. Organisations are less susceptible to the cognitive biases that underpin many “nudge” type interventions. Having said that, some evidence suggests that organisations are not immune from cognitive biases.
Decision makers in organisations have to work within the context of unavoidable constraints such as information asymmetry or limitations, time constraints, limited capacity and experience. Therefore, designing more effective policies and policy interventions may be contingent on understanding the behavioural constraints and biases affecting decision makers and managers.
Historically a failure to embrace more sustainable businesses practices has resulted in higher operating costs, e.g. landfill tax, fines, penalties. Whereas businesses that have successfully implemented more sustainable practices have reduced costs, built a strong brand reputations, attracted investment, driven innovation and created repeat business.
Because of this, increasing numbers of companies have moved towards applying Life Cycle Thinking or circular economy approaches with integrated environmental strategies and management systems. It is clear that these approaches to creating closed-loop, circular production systems have driven resource efficiency and innovation.
There are also many examples of companies working with their supply and value chains in environmentally responsible ways. This is helping these companies to innovate their business model and capture value from these new sustainable approaches.
Typically there are four different levels of a business where resource efficiency can be applied. These include the following:
Business barriers to resource efficiency & circular economy
Weak external pressures & incentives
Often there are weak market signals for investing in resource efficiency. These unclear market demands are reinforced by a misalignment of policy incentives, few favourable tax incentives or consumer subsidies.
Lack of skills and resources
Resource efficiency typically requires new skills, mindsets and resources. Many SMEs in Ireland are highly dependent on the local supply of skills so their capacity to increase their skills base is limited.
Limited access to finance
Businesses often mention the difficulty in raising finance for resource efficiency from internal and external sources.
Inflexible business models
A key barrier to the shift towards more resource efficient business models is that companies remain aligned to and directly or indirectly locked into their existing business models.
The low level of innovation capacity in some businesses can be observed through factors such as a traditional mindset among senior management and a lack of horizontality among different business functions.
A lack of information
A frequently cited barrier to resource efficiency is a lack of information or information asymmetry.
Business behaviour can understood by looking at various levels of business activity and the interaction between these e.g. Capacity, Structures, Social Context, Culture.
While each of these levels have an impact on business behaviour and should considered when designing or evaluating interventions and service it is important to note that some aspects are more dynamic and change over time.
The behavioural economics literature presents a number of social factors that can influence decision making at an individual level. These include factors such as messaging, reciprocity, fairness and inequality-aversion.
Business behaviour can be understood at a basic level by examining various internal factors.
Key Behavioural Insights
From the desk and field research with businesses and service providers across Ireland, there appeared to be some behavioural insights that will be more relevant for future intervention and service design. These include:
Salience refers to how important a topic is perceived to be at a particular time. The salience of resource efficiency can be a key issue to consider when determining whether it becomes a strategic or investable issue for a company. This is typically determined by a number of factors such as the overall resource intensity of the business, the size of the business, its sector or and position within its value chain.
Research has shown that decision makers often present a bias towards established ways of doing things and that change only occurs if there are strong incentives. This status quo bias can be reinforced by organisational or sectoral conditions, for example by having senior management having similar training and backgrounds. These conditions can lead to ‘groupthink’ and this reduces the likelihood to pursue alternatives that vary from the established practices.
Norms & peer influence
There are a wide variety of motivations to invest in resource efficiency, even at an exploratory stage, and these vary between and within sectors. A dominant motivation is the combination of willingness to comply with regulation or licence requirements and informal sectoral norms.
The behaviour literature focussing on individuals has dealt with the delivery of messages and how a key driver of the impact of messaging is who is delivering the message (as opposed to the content). Given that other evidence points to the fact that decision makers seek advice from and add weight to a trusted advisor this has implications for the design of these information based interventions.
It is well understood that the outcome of a decision can depend on how the choice or decision is framed. This means that different outcomes can be achieved by framing choices in different ways. ness of framing through trials. Resource efficiency is often framed or “sold” to industry as a cost and that efficiency savings are framed as a “gain” compared with the theoretical counterfactual case (of not investing in efficiency).
Principle agent problem
This is the situation where production or facilities staff tend to be distant from the senior management that set the strategic direction of the business. This can have restrictive effects on innovation in the business and the same is true for investment in resource efficiency.
Many people in business use heuristics or ‘rules of thumb’ to tackle complex problems and this can often be an efficient and effective approach to making decisions. While this can have adverse implications for particular types of policy interventions (e.g. incentives) the heuristics also help overcome potential delays and “analysis paralysis”.
The term ‘satisficing’ describes the situation where a decision maker achieves ‘satisfactory’ rather than optimal decision outcomes. Sometimes decision makers or managers choose courses of action that are satisfactory or “good enough”. In the case of ‘satisficing’ the decision makers may apply heuristics (e.g. imitating “best practice”) rather than on a complete calculation of options and optimal strategies
Bounded rationality describes the situation wherein sub-optimal decisions are taken because decision makers have to work with limited, often unreliable, information, under time constraints and with limited cognitive capacity to evaluate and process the information that is available.