SBMs and SMEs

SBM literature primarily focusses on large businesses (Durst, Hammoda, Nguyen, & Moieny Asl, Reference Durst, Hammoda, Nguyen and Moieny Asl2021). This is problematic, as the distinctive organisational attributes of SMEs require a ‘tailored approach to design, experiment and innovate their business models’ (Cosenz & Bivona, Reference Cosenz and Bivona2021, p. 658). SMEs are structurally and culturally different to large firms, meaning large firms’ sustainability approaches and practices cannot easily be applied to SMEs (Factor & Ulhøi, Reference Factor and Ulhøi2021). Evidence indicates SMEs are more flexible, nimble, and adaptable enterprises (Bocken, Short, Rana, & Evans, Reference Bocken, Short, Rana and Evans2014; Chen et al., Reference Chen, Chakraborty, Xiong, Scaringella and Descubes2021; Macchion, Toscani, & Vinelli, Reference Macchion, Toscani and Vinelli2023).

The heterogeneity of SMEs increases the complexity for conceptualising and exploring SME business models (Miller et al., Reference Miller, McAdam, Spieth and Brady2021). While a small number of case studies indicate that SMEs can successfully adopt SBMs despite resource scarcity (e.g., Macchion, Toscani, & Vinelli, Reference Macchion, Toscani and Vinelli2023; Schaltegger, Lüdeke-Freund, & Hansen, Reference Schaltegger, Lüdeke-Freund and Hansen2016b; Stubbs, Reference Stubbs2017), there are few studies examining how SBMs work in the ‘real world’, especially in SMEs (Battistella, Cagnina, Cicero, & Preghenella, Reference Battistella, Cagnina, Cicero and Preghenella2018). Most research to date has focused upon the barriers and drivers to SMEs pursuing sustainable business practices, and little is known about SMEs’ approaches to SBM innovation.

Barriers and drivers

A lack of resources, coupled with difficulties in accessing finance (Andrieș, Marcu, Oprea, & Tofan, Reference Andrieș, Marcu, Oprea and Tofan2018; Koirala, Reference Koirala2019), is often cited as a main barrier for SMEs’ engagement with sustainability (Factor & Ulhøi, Reference Factor and Ulhøi2021; Ortiz-Avram et al., Reference Ortiz-Avram, Domnanovich, Kronenberg and Scholz2018). SMEs often struggle to run their business as evidenced by high failure rates (Everett & Watson, Reference Everett and Watson1998) and limited time to take on additional activities related to sustainability (Bevan & Yung, Reference Bevan and Yung2015; Campos, Reference Campos2012). Insufficient in-house knowledge and skills relevant to sustainability issues, alongside a lack of access to external expertise and advice, exacerbate the challenges SMEs face in implementing more sustainable business practices (Aykol & Leonidou, Reference Aykol and Leonidou2015; Oduro, Bruno, & Maccario, Reference Oduro, Bruno and Maccario2021). Consequently, additional costs and investments, increased bureaucracy, and the time and labour intensity associated with implementing sustainable practices present critical barriers to SME sustainability (De Steur, Temmerman, Gellynck, & Canavari, Reference De Steur, Temmerman, Gellynck and Canavari2020). However, while capital plays an important role, resource scarcity and difficult economic circumstances do not automatically hinder SMEs pursuing SBM innovations (Halme & Korpela, Reference Halme and Korpela2014).

An important factor that can negatively influence SMEs’ uptake of SBMs is an unfavourable external regulatory and policy environment (Aykol & Leonidou, Reference Aykol and Leonidou2015; Long, Looijen, & Blok, Reference Long, Looijen and Blok2018). Government policies conventionally target larger organisations (Blundel, Monaghan, & Thomas, Reference Blundel, Monaghan and Thomas2013) and present a complex and confusing regulatory environment for SMEs (Factor & Ulhøi, Reference Factor and Ulhøi2021). SMEs are often excluded from traditional political participation (Westman, McKenzie, & Burch, Reference Westman, McKenzie and Burch2020), and the lack of government support negatively impacts SMEs’ commitment to sustainability (Aykol & Leonidou, Reference Aykol and Leonidou2015). Long, Looijen, and Blok (Reference Long, Looijen and Blok2018) propose owner-managers establish good relationships and a supportive ecosystem around the firm to mitigate these challenges.

Despite these challenges, intrinsic motivation and personal values drive some SMEs to pursue sustainability such as through sustainable entrepreneurship (Bocken, Reference Bocken2015; Weissbrod & Bocken, Reference Weissbrod and Bocken2017). SME owner-managers’ behaviour, beliefs, values, and attitudes are determining factors in sustainability action—more so than SMEs’ size, resource configuration, or industry type (Jenkins, Reference Jenkins2009; Ortiz-Avram et al., Reference Ortiz-Avram, Domnanovich, Kronenberg and Scholz2018). Improving the workplace for employees, internal management, and social responsibility can motivate SME owner-managers to invest in sustainability (Burch et al., Reference Burch, Andrachuk, Carey, Franzeskaki, Schroeder, Mischkowski and Loorbach2016). Employees, external stakeholders, and local networks also play a crucial role in orienting SMEs to sustainability (Luederitz, Caniglia, Colbert, & Burch, Reference Luederitz, Caniglia, Colbert and Burch2021).

An entrepreneurial style, lean and flexible organisational structures, and the strong role played by the owner-manager and their values may better situate SMEs for radical business model innovations (Klewitz & Hansen, Reference Klewitz and Hansen2014; Long, Looijen, & Blok, Reference Long, Looijen and Blok2018). SMEs’ smaller and less rigid organisational structures and the high involvement of owner-managers in the day-to-day operations (Burch et al., Reference Burch, Andrachuk, Carey, Franzeskaki, Schroeder, Mischkowski and Loorbach2016; Hansen & Klewitz, Reference Hansen, Klewitz and Wagner2012) enable faster decision-making and the ability to respond quickly to market changes (Battistella et al., Reference Battistella, Cagnina, Cicero and Preghenella2018). The likely absence of shareholders may also provide more opportunity for sustainable activities in SMEs by freeing owner-managers from short-term thinking and related pressures such as quarterly reports (Factor & Ulhøi, Reference Factor and Ulhøi2021; Jenkins, Reference Jenkins2004). This can provide SMEs with autonomy over resource allocation (Cambra-Fierro & Ruiz-Benítez, Reference Cambra-Fierro and Ruiz-Benítez2011). As a result, SMEs can provide a context for radical business model innovations (Ebben & Johnson, Reference Ebben and Johnson2005; Long, Looijen, & Blok, Reference Long, Looijen and Blok2018). Christensen, Raynor, and McDonald (Reference Christensen, Raynor and McDonald2015) propose SMEs could disrupt entire industries through innovative and creative entrepreneurship despite having fewer resources than established mass-market players.

Nevertheless, implementing an SBM is complex and challenging for it ‘is a real process of transformation that must be supported by a substantial commitment to sustainability that involves the organisation in its entirety’ (Macchion, Toscani, & Vinelli, Reference Macchion, Toscani and Vinelli2023, p. 3). While there are examples of SMEs successfully adopting SBMs, such as B Corps, social enterprises, and sustainability entrepreneurs, little is known about the types of capabilities and skills SMEs need to successfully navigate this process.

Capabilities

Miller et al. (Reference Miller, McAdam, Spieth and Brady2021) reinforce the importance of capabilities in business model innovation. They found that dynamic capabilities, external knowledge management capabilities, and absorptive capacity (competencies, organisational factors, and inter-organisational linkages (Aboelmaged & Hashem, Reference Aboelmaged and Hashem2019)) support SMEs in innovating their business models. Further, the ability to generate new and creative strategies to adapt to changes in the business environment through a set of complex but identifiable processes (dynamic capabilities) characterises the most proactive sustainability strategies of firms (Martín-Tapia, Aragón-Correa, & Rueda-Manzanares, Reference Martín-Tapia, Aragón-Correa and Rueda-Manzanares2010). This makes continuous learning critical for changing business models (Achtenhagen, Melin, & Naldi, Reference Achtenhagen, Melin and Naldi2013; Roome & Louche, Reference Roome and Louche2016).

Beutell, Kuschel, and Lepeley (Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021) argue businesses operate in an increasingly uncertain, complex, and ambiguous environment which makes constructive learning experiences, and the ability to deal with failure, critical tools for resilience, survival, and success. As entrepreneurship is the field of human activity most exposed to the risk of failure (Beutell, Kuschel, & Lepeley, Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021) and SMEs already operate under a higher degree of uncertainty compared to larger firms (Miller et al., Reference Miller, McAdam, Spieth and Brady2021), SMEs need to develop the ability to deal with failure and to continuously adapt their abilities to changing circumstances.

Accepting failure as a necessary condition to advance and grow is a critical step to transform negative experiences into positive driving forces and failure into success (Beutell, Kuschel, & Lepeley, Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021). This mindset is crucial for experimentation as failure is a natural and often useful outcome of the experimentation process (Chesbrough, Reference Chesbrough2010). Experimentation, in turn, is crucial for SBM innovation (Evans et al., Reference Evans, Vladimirova, Holgado, Van Fossen, Yang, Silva and Barlow2017) and involves a willingness to experiment with ideas and to build new practices (Roome & Louche, Reference Roome and Louche2016). However, Battistella et al. (Reference Battistella, Cagnina, Cicero and Preghenella2018) note that due to their limited resources as well as external barriers, SMEs possess a reduced capacity for experimenting with business model innovation. If SMEs are to leverage the positive impact of sustainable practices on financial performance (Bartolacci, Caputo, & Soverchia, Reference Bartolacci, Caputo and Soverchia2020) and transition towards SBMs, they need to improve their innovative capacity.

According to Jenkins (Reference Jenkins2009), SME owner-managers require specific skills such as learning and networking to support proactive, responsible, and sustainable strategies. Soft skills, such as effective communications, creativity, decision-making, agility, and perseverance, are increasingly critical for survival in uncertain and volatile environments. They are developed through interactions with friends, parents, children, partners, co-workers, customers, team members, supervisors, and leaders (Beutell, Kuschel, & Lepeley, Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021). Scholars stress the importance of collaborative capabilities, leveraging network partners, and the role of intermediaries as critical success factors that can aid innovation and assist with overcoming size-based limitations and ultimately support a transition to an SBM (Durst et al., Reference Durst, Hammoda, Nguyen and Moieny Asl2021; Miller et al., Reference Miller, McAdam, Spieth and Brady2021; Stubbs, Dahlmann & Raven, Reference Stubbs, Dahlmann and Raven2022).

Finally, transitioning to an SBM requires strong change capabilities (Sommer, Reference Sommer2012), such as clear guidance and leadership (Long, Looijen, & Blok, Reference Long, Looijen and Blok2018). Sommer (Reference Sommer2012) highlights the importance of changing mindsets which necessitates strong leadership capabilities. Similarly, Roome and Louche (Reference Roome and Louche2016, p. 29) reinforce the significance of strong commitment among management to participating and communicating across networks, concluding that transformation unfolds through a culture of ‘questioning, learning, testing, and innovating linked to strong support for empowerment of employees’.

While these skills and capabilities are regarded as critical enablers of SBMs, Preghenella and Battistella (Reference Preghenella and Battistella2021) conclude there is scant knowledge of the organisational capabilities needed to implement an SBM. This makes it difficult to draw generalisable conclusions and to provide SMEs with advice on how to develop capabilities to implement SBMs.

Although SBM research is evolving rapidly, existing literature is primarily conceptual with a lack of empirical studies (Roome & Louche, Reference Roome and Louche2016; van Bommel, Reference van Bommel2018). How SMEs can develop and implement SBMs is underexplored (Geissdoerfer, Vladimirova, & Evans, Reference Geissdoerfer, Vladimirova and Evans2018; Macchion, Toscani, & Vinelli, Reference Macchion, Toscani and Vinelli2023) and much remains to be learned about SMEs’ business models both theoretically and practically (Miller et al., Reference Miller, McAdam, Spieth and Brady2021). This paper addresses these gaps in knowledge by examining how ‘lighthouse’ SMEs successfully adopt SBMs through exploring the enablers and inhibitors, key skills and capabilities, trade-offs, and major challenges and opportunities.

Data selection

We used the Australian Bureau of Statistics’ (2020) definition of SMEs: micro–businesses employ between 1 and 4 people; small businesses employ between 5 and 19 employees; and medium-sized business employ between 20 and 199 employees. Our focus on lighthouse SMEs, those considered as sustainability leaders, required a purposive sampling method (Stake, Reference Stake, Denzin and Lincoln2000). We first reviewed scholarship for examples of SBMs adopted by SMEs, which identified B Corps, social enterprises, and circular economy models (Geissdoerfer, Vladimirova, & Evans, Reference Geissdoerfer, Vladimirova and Evans2018; Pizzi, Leopizzi, & Caputo, Reference Pizzi, Leopizzi and Caputo2022; Schaltegger, Hansen, & Lüdeke-Freund, Reference Schaltegger, Hansen and Lüdeke-Freund2016a; Stubbs, Reference Stubbs2017, Reference Stubbs2019). B Corps are for-profit businesses certified by B Lab to meet rigorous standards for environmental and social performance, accountability, and transparency—using ‘the power of business to solve social and environmental problems’ (Stubbs, Reference Stubbs2017, p. 299). B Lab have certified over 470 B Corps in Australia, representing a wide range of industries from accounting to waste management. Social enterprises are focused on having a social impact through generating and investing profits to address societal issues (Geissdoerfer, Vladimirova, & Evans, Reference Geissdoerfer, Vladimirova and Evans2018). Social Traders estimate there are over 12,000 social enterprises in Australia, with about 450 certified, operating across a broad spectrum of industries, such as childcare, hospitality, housing, education, and insurance. A circular economy model minimises resource input, waste, emissions, and energy leakage (Geissdoerfer et al., Reference Geissdoerfer, Savaget, Bocken and Hultink2017) by reusing, repairing, and remaking (rather than just recycling) (Bocken et al., Reference Bocken, Short, Rana and Evans2014; Pizzi, Corbo, & Caputo, Reference Pizzi, Corbo and Caputo2021). Circular companies have to rethink their way to do business (Pizzi, Leopizzi, & Caputo, Reference Pizzi, Leopizzi and Caputo2022). While there are no estimates of the number of circular SMEs in Australia, the Australian Circular Economy Hub reports a sharp increase in uptake in the last few years.

We focused on SMEs operating in metropolitan Melbourne, Australia, where there is a concentration of SMEs and where the researchers are located. We chose Australia because SMEs are considered to be key to driving growth in Australia; they are the largest employer; they contribute more than half of the national GDP; and they make up 99.8% of all Australian businesses (CSIRO, 2022). Australia also has a significant concentration of B Corps, social enterprises, and SMEs implementing circular economy models.

First, we compiled a list of Melbourne-based SMEs from B Lab’s (B Corp certifying body) directory of certified B Corps, Social Traders’ database of certified social enterprises, Climate Active’s database of certified organisations, Victorian Government Social Enterprise Strategy, and Australian Circular Economy Hub. Next, we reviewed SME sustainability award winners from the Sustainability Victoria awards, Premier’s Sustainability Awards, and Banksia Sustainability Awards. Finally, we used snowball sampling by asking participants for referrals to other SMEs who they considered leaders in sustainability. This resulted in 73 SMEs that were contacted through email or LinkedIn. Fourteen SMEs agreed to participate (five micro, five small, and four medium—see Table 1). We interviewed one person from the micro and small SMEs and two people from each of the three largest SMEs, with a total of 17 interviews. Eleven SMEs were certified B Corps, eight identified as social enterprises, and four as circular economy (some identified as a combination of these). We aimed to interview the founders of the SMEs as they have an in-depth understanding of the SMEs’ business model and their experiences, challenges, and processes in implementing their SBM. They have the knowledge required to answer the interview questions. In some cases, the founder referred us to an employee who had been with the SME since the SME’s early days. The roles of the participants included founder (10), CEO/managing director (2), and senior manager (5).

Table 1.

Summary of participants

This study did not seek to achieve a representative sample of SMEs, but rather purposively focused on generating rich insights from SMEs who have direct experiences experimenting with and implementing SBMs. The small sample size was also due in part to impacts of COVID-19, as many SMEs indicated they were too busy ‘surviving’ to participate. One limitation of this study’s exploratory qualitative approach is that it will not allow for generalisation to a population. However, this is not the intention of an exploratory research study, which aims to generate theoretical understanding that can then be tested in other contexts to establish its range of application (Blaikie, Reference Blaikie2000).

Data collection

Two of the authors conducted the interviews. Our aim was to interview all participants face-to-face, but COVID-19 lockdown restrictions meant only one interview was face-to-face with 16 conducted via zoom. Interviews were conducted between November 2021 and September 2022 and ranged from 45 to 90 minutes. We found that zoom offered a similar experience to face-to-face interviews in generating rich insights into SMEs’ experiences of SBMs. To prepare for the interviews, we reviewed each SME’s website, relevant certification reports, and other publicly available information such as media coverage.

Semi-structured interviews allowed us to ask open questions, letting the participants speak until they had exhausted the topic. We asked participants about their business model, the social and environmental issues they address, and their business practices (see Table 2). The interviews were recorded (with permission) and transcribed. The transcribed interview was emailed to the participant for verification and transparency. Codes were ascribed to individual participants to ensure their anonymity (Table 1).

Table 2.

List of interview questions

Data analysis

Informed by an interpretivist mode of inquiry, content analysis of each interview involved an iterative three-stage qualitative coding process to draw out key themes (Gioia, Corley, & Hamilton, Reference Gioia, Corley and Hamilton2012; Strauss & Corbin, Reference Strauss and Corbin1998). First-order codes were grouped into categories (second-order coding) and categories into themes (third-order coding) (see Table 3 for codes, categories and themes).

Table 3.

Themes generated from the coding process with sample categories and codes

Codes were derived from the interview data based on the actual words or terms used by the interviewees (which Strauss and Corbin (Reference Strauss and Corbin1998) refer to as in vivo codes) or by summarising the concepts discussed by the interviewees into themes (constructed codes). Coding included chunks of text at the phrase, sentence and paragraph level. The interview transcripts were uploaded into the NVivo software package for coding. The two authors who conducted the interviews initially coded three of the interviews and compared the coding results. Based on their review of their coding, they agreed on an initial coding structure. One author then coded the rest of interviews. The second person crossed-check the coding and some codes and categories were revised. We provided a transcript of the participant’s interview to them as well as de-identified findings for their comment and feedback. This assisted in validating the research results.

Table 4 summarises the steps in the research process.

Table 4.

Research process

Reasons for adopting the SBM

We identified three interconnected reasons why SMEs adopted their SBM: for credibility, to ‘do some good’, and for financial reasons. Half of the participants stated they adopted their SBMs to ‘do some good’, a motivator identified by Upward and Jones (Reference Upward and Jones2016). This was variously expressed as helping to change business, leaving a positive legacy, solving global social and environmental challenges, advancing sustainability, creating the most positive social impact and the least environmental impact, and enabling the social sector. As one participant stated:

Further to ‘doing well by doing good’, financial considerations remain important drivers for adopting a for-profit SBM for three SMEs, a characteristic not previously identified in the literature. While Upward and Jones’ (Reference Upward and Jones2016) conceptual SBM framework identified that ‘doing well’ (profitability) is a characteristic of SBMs, our empirical findings reveal SME participants’ desire for financial independence. They actively avoided becoming reliant on donations and philanthropic funding, which are common in a not-for-profit (NFP) model:

For another SME, it was important to prove that a for-profit model can be focused on sustainability:

Four SMEs emphasised the importance of credibility, as identified in previous research on B Corps (Stubbs, Reference Stubbs2019; Villela, Bulgacov & Morgan, Reference Villela, Bulgacov and Morgan2021). This is achieved through certification, or accreditation, of their business models by intermediaries such as Social Traders and B Lab. Certification gives customers confidence in SMEs’ governance processes and proving ‘you’re doing what you say you’re doing’. Participants further explained that the credibility gained through being part of a social enterprise community ‘opens doors’ to new customers in the business and government sectors who want to work with, or procure from, social enterprises.

Enablers and inhibitors

Partners, customers, and staff provide the most significant support for business and sustainability outcomes. While two SMEs were supported by government programs in the areas of ethical procurement and energy efficiency, overall, governments were regarded as inhibitors rather than enablers. Meanwhile, over half of the participants emphasised their customers are the most important enablers. In addition to opening doors to new customers (s4.1), participants pointed to the loyalty of their ‘like-minded’ and ‘passionate’ customers who continue to support them because of their focus on sustainability, and ‘spread the word’ to others.

While Jenkins (Reference Jenkins2004) found SMEs are vulnerable to customer loss, one SME pointed to the low customer loss rate, less than 1%, which is the lowest in their industry. They attribute this to their social impact business model, as customers value the positive social impacts. Another SME found that over 70% of customers were ‘gifting’ their products to friends which they viewed as ‘a kind of secret magic sauce’ assisting them to scale.

Staff who are aligned with the SMEs’ SBM and values are also important enablers. This reinforces Luederitz et al.’s (Reference Luederitz, Caniglia, Colbert and Burch2021) research that identified an alignment of business purpose and employees’ values supports the integration of sustainability into SMEs’ business models. The participants also indicated people are proactively approaching them ‘not just for a salary or a job, but they’re coming because they also want to make a difference’. Additionally, trust ‘that you build up over time through your activities’ is key to attracting and retaining the right staff.

The SMEs work with several industry and business partners who support them, which frees them up to focus on their sustainability outcomes. These include graphic designers, web developers, billing services, payment processing, technical support, manufacturing, logistics, and in some cases customer service.

SMEs also partner with organisations that are values-aligned in the environmental and social economy sectors. These partners typically have expertise that the SMEs don’t have or don’t want to acquire. Similar to research in the broader sustainability literature (e.g., Beutell, Kuschel, & Lepeley, Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021; Long, Looijen, & Blok, Reference Long, Looijen and Blok2018), the SMEs reinforced that without the support of their partners, they couldn’t achieve their sustainability outcomes.

This contradicts previous SME research that found a lack of access to external expertise and advice exacerbates the challenges of adopting sustainable business practices (Aykol & Leonidou, Reference Aykol and Leonidou2015; Oduro, Bruno, & Maccario, Reference Oduro, Bruno and Maccario2021). Finally, the SMEs also identified family, friends, mentors, and local communities, where SMEs often hire from, as enablers of their business and sustainability outcomes. This resonates with extant literature which emphasises the connections SMEs have with local places and their embeddedness within local communities (e.g. Westman, Moores, & Burch, Reference Westman, Moores and Burch2021).

The three biggest inhibitors to the SMEs’ SBM and sustainability outcomes were government, big business, and financial issues. More than half the participants talked about the difficulties of working with governments—local, state, and federal—as both clients and as grant-providers. The participants found dealing with government representatives and processes was complex and time-consuming and suggested grant processes are not designed for SMEs. Grant applications require a ‘massive time investment with very little outcome’. This reinforces previous research where a lack of government support and an unfavourable and complex regulatory environment were found to negatively impact SMEs’ commitment to sustainability (Aykol & Leonidou, Reference Aykol and Leonidou2015; Factor & Ulhøi, Reference Factor and Ulhøi2021).

Others noted the process-heavy, administration-focused grant schemes, recommending they be simplified and streamlined to benefit SMEs ‘that need that type of support the most’. Participants also identified government decision-making as too slow for their timeframes, noting ‘it’s very common to take two or three years to make a decision or to get funding’. Yet another issue raised identified how governments can make ‘bad’ sustainability decisions which ultimately inhibit SMEs’ sustainability impacts:

Government grants can also be inflexible. One SME found that they were a poor fit for government grants and tenders, even though they were encouraged to apply. This SME addressed both environmental and social issues but they were asked to fit into one category only. They were also passed between the sustainability group and community group leading to them giving up.

Working with government clients was also regarded as time consuming and resource-intensive for SMEs. One SME took 6 years to secure a contract with a large state government department and has decided not to bid for more work. Governments often bundle projects together into a program of work, and SMEs may only be able to address one part of the program. While one SME would have ‘loved to have done a lot more in the government space’, the procurement and tender processes do not support SMEs who don’t have a holistic offering that addresses a complete program of work.

One SME pointed to government’s risk adverse mindset inhibiting sustainable SMEs’ growth. They found governments are willing to fund SMEs once they are successful, which is not when SMEs most need the funding.

The finance industry was also identified as being challenging to work with—they are reluctant to fund SMEs pursuing sustainability—reinforcing previous research (see, e.g., Andrieș et al., Reference Andrieș, Marcu, Oprea and Tofan2018; Koirala, Reference Koirala2019). In one SME’s experience, venture capital funding was very process-heavy and administration-focused. In the future, this inhibitor may be mitigated by promising funding developments as Pizzi, Corbo, & Caputo (Reference Pizzi, Corbo and Caputo2021) found that FinTech firms are starting to launch new services to support SMEs to adopt SBMs.

In addition to limited government and finance industry support, two SMEs identified that big businesses, which dominate the market, constrain their market growth opportunities. For example, one SME found it challenging to establish a relationship with supermarkets to distribute its products. The supermarkets had exclusive contracts with the only two local manufacturers, which meant that ‘one, it couldn’t be supermarkets, it had to be online, and two, it couldn’t be Australian made’. Monopolist markets appear to inhibit SMEs’ ability to broaden their sustainability impacts.

Skills required to enable an SBM

We asked participants about the most valuable or important factors for achieving their SBMs and sustainability outcomes. They identified three main categories of skills required to support their SBMs: soft skills, business skills, and technical skills. Reinforcing Beutell, Kuschel, and Lepeley' (Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021) and Jenkins (Reference Jenkins2009), soft skills are a critical component in implementing sustainability. Three main types of soft skills identified by the participants for the success of their SBMs were analytical and problem-solving skills, managing relationships with stakeholders, and persistence and tenacity.

Problem-solving skills are important as the SMEs ‘see’ a sustainability problem and ‘want to solve it’. While problem-solving skills have not been discussed in the SBM literature, they are identified in the sustainability entrepreneurship scholarship (Belz & Binder, Reference Belz and Binder2017). Problem-solving typically involves working with stakeholders—partners, clients, suppliers, manufacturers, service providers, government bodies, and financiers—which renders engaging and managing relationships with stakeholders crucial. As previously found, collaboration and networking are critical success factors for implementing an SBM (Long, Looijen, & Blok, Reference Long, Looijen and Blok2018).

Participants suggested tenacity and persistence to achieve SMEs’ sustainability outcomes are crucial—‘being determined, committed and not looking at the short term’.

Aligned with persistence, one participant emphasised the importance of learning skills and a willingness to fail. Beutell, Kuschel, and Lepeley (Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021) argued that the ability to deal with failure is critical for SMEs’ survival and success. Dealing with failure is important for experimenting with, and innovating, SBMs.

While persistence and tenacity seem to be hallmarks of SMEs who are committed to their sustainability values and purpose, adaptability and flexibility are also important (Martín-Tapia, Aragón-Correa, & Rueda-Manzanares, Reference Martín-Tapia, Aragón-Correa and Rueda-Manzanares2010). SMEs need a ‘flexible mindset and approach’ acknowledging that ‘we can’t control everything’.

The importance of a culture that nurtures purpose and values was raised by several participants, helping to attract staff whose ‘attitude or values really align to ours’ (see s4.2). This informs recruitment and people management practices, which are key business skills—hiring and retaining people that ‘encapsulate the values of the organisation’. Communications skills support this ‘to get our ideas across and inspire people’. The other important business skill identified by SME participants is project management:

These findings mirror those associated with large companies, where business model transformation occurs through ‘questioning, learning, testing, and innovating linked to strong support for empowerment of employees’ (Roome & Louche, Reference Roome and Louche2016, p. 29).

Technical skills, particularly IT and technology skills, are typically outsourced. While the technical skills are specific to each SMEs’ business, it is challenging for SMEs to ‘have the ability to be across the business and the technology’.

Trade-offs

While two participants didn’t ‘feel like we’ve had any really significant trade-offs’, the others identified two significant, inter-related, areas of trade-offs: financial and sustainability outcomes.

Nearly all participants talked about financial trade-offs, which previous SME sustainability literature identified (e.g., Koirala, Reference Koirala2019). The SMEs’ financial trade-offs included founders not taking a salary or paying themselves a minimal salary; using founders’ own capital to support the business; lower profit margins and relatedly not having the funds to grow or scale the business. The SMEs have lower profit margins than their competitors because they build sustainability into their operational practices to fulfil their SBM. One participant argued that ‘every part of a product is a trade-off’—from the materials used for packaging, to how it is shipped and stored. For another,

Contrary to the broader literature on SBMs where employees were found to be paid relatively lower wages (Morioka, Bolis, Evans, & Carvalho, Reference Morioka, Bolis, Evans and Carvalho2017), three participants indicated they pay their staff above award wages and/or have employee wellbeing programs, such as providing ‘a thousand dollars a year towards any sort of health or mental wellness thing’.

Further impacting profit margins, half of the SMEs donate their profits or provide pro-bono, or at cost, services to NFPs, and other organisations ‘if we think it’s important’. As one SME emphasised, ‘we’re comfortable with that—it’s why we exist’.

However, for another SME this meant it was ‘impossible for us to raise capital for the first few years’ as people didn’t understand the business model. The financial trade-offs inhibit growth:

One SME highlighted the ‘tension’ in using their business model as a funding vehicle for delivering environmental and social outcomes. One tension exists where the more profitable an SME becomes, the more it can help alleviate global issues such as extreme poverty and carbon emissions. Alternatively, if the profits are invested back into the business, this can lay the foundation for future growth—to ‘help the scale of efficiency as we grow’—and subsequently more profits to invest in sustainability outcomes. For another participant, weighing up how much they invest in growth and how much in sustainability is a ‘healthy tension’, but ‘marrying those two together—there’s no easy hard-and-fast rule for us, it is a constant exchange of communication and dialogue’. As one participant pointed out, there are tensions in an SBM that is ‘looking at the lens through impact’ rather than purely commercial, which is a big trade-off. Finally, two SMEs talked about environmental sustainability tensions related to the use of plastic. For example,

Major challenges and opportunities to implementing an SBM

Participants were asked to discuss their main challenges with implementing their SBM, as well as the opportunities. The two most discussed challenges were lack of resources, particularly financial, and COVID-19. This reinforces previous research on barriers for SMEs engaging with sustainability (Andrieș et al., Reference Andrieș, Marcu, Oprea and Tofan2018; Koirala, Reference Koirala2019). While lack of time is a common barrier identified in the literature, it was only mentioned by two SMEs.

For more than half of the SMEs, the financial challenges were the most significant in adopting an SBM to achieve their social and environmental impacts (see s4.4). Most of the SMEs are self-funded, which limits their capacity to do everything they want to do and grow their business.

These SMEs found it difficult to get funding from external sources. One SME pointed to the limited investment opportunities for their company compared to bigger privately owned businesses which they compete with. They argued that ‘we start off playing on an uneven playing field’.

This inhibits SMEs’ competitiveness. Four SMEs specifically pointed to their limited marketing capacity to build brand awareness and sales.

While financial resources were the primary challenge, ‘people’ resources were also mentioned by four SMEs. The SMEs are restricted in how many people they can hire. This means they may not have all the knowledge and experience they require to implement their ideas, resulting in a steep learning curve. It may also lead to staff burnout.

COVID-19 was raised as a major challenge by a third of the SMEs. It created uncertainty through changes in consumer spending patterns, supply chain disruptions and reduced demand for SMEs’ products and services. One SME discarded their 5-year plan as their business became ‘more reactive than it possibly should be, but all the best laid plans in the world didn’t have COVID-19 in them’. Another SME emphasises the importance of adaptability, identified in s4.3, as a key skill to dealing with increasing uncertainty (Beutell, Kuschel, & Lepeley, Reference Beutell, Kuschel, Lepeley, Lepeley, Beutell, Abarca and Majluf2021):

The main opportunities arising from SMEs’ SBMs are the ability to drive change, internally and externally, and leveraging partnerships and customer relationships to amplify the SMEs’ impact. One SME stated they are ‘always trying to learn and grow’ so they can adapt their business model ‘as new ideas come in’. Another SME is firmly focused on driving wider change, to encourage other SMEs to adopt SBMs:

Research on SBMs also highlights the role of businesses in shaping sustainability transformations beyond their own boundaries (Upward & Jones, Reference Upward and Jones2016). Two-thirds of the SMEs leverage partnerships and customer relationships to ‘enable and amplify’ impacts, and deliver outcomes, for ‘not just us, but social enterprises in general’. Some of these SMEs found that sustainability is a really strong lever to drive customer growth, while others see increasing opportunities to align more closely with partners and customers that share the same sustainability values.

Of note, one SME’s business grew during COVID-19 ‘largely due to the network of people who are shopping their values’. Another identified this as their major opportunity: leveraging increasing consumer sentiment that values sustainable practices (Ardley & May, Reference Ardley and May2020; Nigam, Benetti, & Mbarek, Reference Nigam, Benetti and Mbarek2018). Furthermore, an SME talked about leveraging their clients, and prospective clients,

This appears to contradict marketing research that identified a clear sustainability values-action gap among consumers (Diez-Martin, Blanco-Gonzalez, & Prado-Roman, Reference Diez-Martin, Blanco-Gonzalez and Prado-Roman2019).

Summary of findings

Table 5 summarises the key findings of the factors that influence SMEs’ adoption of SBMs.

Table 5.

Summary of findings

Theoretical implications

Our research provides several contributions to the extant literature by reinforcing findings in prior literature, extending the literature through deepening the understanding of the processes of adopting and developing SBMs in SMEs, and generating new theoretical insights into the factors facilitating SMEs’ adoption of SBMs. Overall, the entrepreneurial style, lean and flexible organisational structures, and sustainability values of the founders and staff positioned the lighthouse SMEs for radical business model innovation, reinforcing Klewitz and Hansen’s (Reference Klewitz and Hansen2014) and Long, Looijen, & Blok’s (Reference Long, Looijen and Blok2018) findings.

Adding further support to Luederitz et al. (Reference Luederitz, Caniglia, Colbert and Burch2021), the research study found that the alignment of employee values with SBM values facilitates sustainability success. Furthermore, collaborating and networking with values-aligned partners and other organisations is critical to success of an SBM, reinforcing Long, Looijen, & Blok (Reference Long, Looijen and Blok2018). Our research strengthens prior literature that found that lack of funding opportunities stymies innovation (Andrieș et al., Reference Andrieș, Marcu, Oprea and Tofan2018; Koirala, Reference Koirala2019; Pizzi, Leopizzi, & Caputo, Reference Pizzi, Leopizzi and Caputo2022). Finally, our findings align with those of Aykol and Leonidou (Reference Aykol and Leonidou2015) and Factor and Ulhøi (Reference Factor and Ulhøi2021), providing further evidence that a lack of government support hinders adoption of sustainable practices and SBMs.

Our research also extends existing literature. Previous scholars found that unfavourable external regulatory and policy environment negatively impacts SMEs’ commitment to sustainability (Aykol & Leonidou, Reference Aykol and Leonidou2015; Long, Looijen, & Blok, Reference Long, Looijen and Blok2018). Our research expands Long, Looijen, & Blok (Reference Long, Looijen and Blok2018) and Aykol and Leonidou (Reference Aykol and Leonidou2015) through understanding how governments impact SMEs’ ability to adopt SBMs. For example, governments can make ‘bad’ sustainability decisions, which constrains SMEs’ positive environmental and social impacts. In addition, government support is not well-tailored to SMEs’ business models (poor fit) and governments’ risk adverse mindset means they fund already successful SMEs rather than supporting SMEs to experiment with new SBMs. Our research also addresses knowledge gaps identified by Preghenella and Battistella (Reference Preghenella and Battistella2021) through expanding understanding of the skills and capabilities required for SMEs to successfully implement an SBM.

Finally, our research provides new theoretical contributions to the literature by identifying the factors that can facilitate SMEs’ adoption of SBMs, going beyond prior literature that found that collaboration, leveraging partners, and intermediaries are critical (Durst et al., Reference Durst, Hammoda, Nguyen and Moieny Asl2021; Kundurpi et al., Reference Kundurpi, Westman, Luederitz, Burch and Mercado2021; Stubbs et al., Reference Stubbs, Dahlmann and Raven2022) for ‘mainstreaming’ SBMs in the SME sector (Stubbs, Reference Stubbs2017). In contrast to Jenkins (Reference Jenkins2004) who highlighted SMEs’ vulnerability to customer loss, we found that SBMs can help SMEs to attract and retain customers—the ‘secret magic sauce’—making them more resilient. Furthermore, the SMEs’ SBMs facilitate building relationships with stakeholders providing expertise that SMEs lack, as well as attracting highly motivated staff. This study thereby demonstrates that adopting an SBM is a challenging but also an immensely rewarding process that can ‘open doors’, leading to tangible benefits and new opportunities for SMEs.

While the research found that a monopolist business environment can inhibit SMEs’ sustainability reach and impacts, the findings suggest that as more customers ‘shop their values’, as more organisations seek to partner or collaborate with sustainable SMEs, and as more SMEs adopt SBMs, this can motivate other SMEs to adopt SBMs. These insights help to build theory about an emerging enabling environment that can support SMEs to adopt SBMs, in lieu of a more ‘traditional’, or formal, enabling environment of government support, regulation, and policies identified by Johnson and Schaltegger (Reference Johnson and Schaltegger2016). Intermediaries such as certification bodies (B Lab and Social Traders) also participate in this alternative enabling environment by facilitating a support network for sustainable SMEs.

The findings point to a reconceptualisation of the enabling environment that promotes and supports sustainable SMEs’ adoption of SBMs. Long, Looijen, & Blok (Reference Long, Looijen and Blok2018) highlighted the importance of a supportive ecosystem around the firm, which, for this study’s SMEs, currently is not provided by government policies, regulatory environment and funding support. It raises the question of what is the role of government in supporting and shaping future sustainable innovation and growth in the SME sector?

Practical implications

The findings can help guide SMEs who are considering adopting an SBM. The opportunities and enablers identified by the SMEs could provide a pathway towards an SBM as well as help to drive growth. The SMEs’ experiences suggest these opportunities and enablers could be further leveraged and supported to broaden SBMs’ appeal to SMEs. This includes leveraging an increasing trend for customers, as well as employees and potential partners, to ‘shop their values’, helping to offset profit/purpose compromises that participants identified (s4.4).

The emerging SME enabling environment suggested by this study—intermediaries, sustainable SMEs, and values-aligned customers, partners, and employees—may encourage and facilitate other SMEs to successfully adopt SBMs. SMEs could leverage this ‘ecosystem’ by building relationships with key stakeholders in the enabling environment, such as B Lab and Social Traders.

A key insight from the SMEs was the importance of soft skills in implementing SBMs, particularly during global crises and disruption. Burch et al. (Reference Burch, DiBella, Wiek, Schaltegger, Stubbs, Farrelly and McCormick2022) argue that the impacts of COVID-19 are similar to a large-scale environmental disaster, and place unprecedented pressures on SMEs’ operations. Persistence, tenacity, flexibility, adaptability, and a willingness to learn and fail are key soft skills not only for implementing SBMs in SMEs but for navigating and responding to high levels of uncertainty and rapid changes in the external environment (Halkos & Skouloudis, Reference Halkos and Skouloudis2020). Developing these skills builds resilience, enabling SMEs to successfully operate in times of uncertainty and respond to new requirements through changes to their business models (Burch et al., Reference Burch, DiBella, Wiek, Schaltegger, Stubbs, Farrelly and McCormick2022). Considering the important role of these skills in facilitating the journey of the lighthouse SMEs, they may be described as potentially transformative capabilities that other SMEs could develop. However, more evidence is needed to confirm this. It may be beneficial for SMEs to critically assess the level of these skills in their organisation and strengthen them before embarking on a transformational process towards adopting an SBM.

There are also important policy implications as these findings confirm and extend previous research on the role of governments. They point to significant room for improvement for better tailoring government support to underpin SMEs’ sustainable transformations. For example, streamlining funding policies to decrease complexity, speed-up decision-making, and prioritise SMEs in early stages of sustainability innovation. There may also be opportunities for tailoring policies to facilitate knowledge sharing and sharing of best practices among SMEs, for example from recipients of government funding and sustainability awards. Finally, consultation, and collaboration, between government policy-makers and SMEs in decision-making processes may contribute to more tailored, and effective, policies to support SMEs’ sustainability transitions.

Limitations and future research

As the sample of SMEs participating in this study is not representative of the numerous and extremely heterogeneous SME industry sectors, the findings cannot be generalised. However, these findings lay a foundation for future research that could test and further enhance this study’s findings, by using larger samples and by focusing on particular industry sectors (e.g. manufacturing, retail, or food/beverage sectors). Similarly, the findings may not resonate with other country contexts, particularly regarding the external enabling conditions, and would require further investigation.

While this study examined ‘lighthouse’ SMEs’ experiences in adopting SBMs, future research could investigate in more depth their innovation and experimentation processes, to help overcome Battistella et al.’s (Reference Battistella, Cagnina, Cicero and Preghenella2018) observation that SMEs possess a reduced capacity for experimenting with business model innovation. Furthermore, evaluative research that establishes whether SMEs’ SBMs lead to tangible and transformative sustainability outcomes would help to lend substance to claims of delivering environmental and social good.

This study identified an emerging external enabling environment and the important role it plays in supporting SMEs’ adoption of SBMs. Future research could identify and engage with SMEs’ stakeholders and other actors in the external enabling environment, including government agencies who were identified as a clear inhibitor to SME’s adoption of SBMs. Further qualitative research would assist in understanding the roles and influences of these actors in facilitating SMEs’ adoption of SBMs, and how they could contribute to accelerating SMEs’ transitions to SBMs.