Circular Business Models: Doing More with Less for Longer - PDF

Introduction This chapter will help you gain a better understanding of what circular business models (CBMs) are, how they can help individual companies and organisations become circular and competitive, create new and valuable relationships with their user-customers, how they put companies on the p...

Introduction This chapter will help you gain a better understanding of what circular business models (CBMs) are, how they can help individual companies and organisations become circular and competitive, create new and valuable relationships with their user-customers, how they put companies on the path to more optimal performance, and why CBMs will help shape the transition to a circular economy. From linear to circular business models Business models (BMs) are generally considered as a description of how an organisation creates, delivers, and captures value (Osterwalder and Pigneur 2010). Circular business models or circular economy business models (CEBMs) refer to innovative business models in which the creation of value maintains the economic value of the product and its inputs for as long as possible by reducing the dependence on virgin materials, using renewable energy systems, adopting sustainable production practices and, more generally, making the entire value chain more “green”, also known as greening.1 1 Based on Rosa, Sassanelli, Terzi (2019). Towards Circular Business Models: A systematic literature review on classification frameworks and archetypes, Journal of Cleaner Production, Vol 236, 2019, 117696, ISSN 0959-6526, https://doi.org/10.1016/j.jclepro.2019.117696.) 15 A typical linear business model, which applies different forms of what is deemed a “take-make-waste” approach, aims to create and capture value with the stated objective of maximising profit for the company and its shareholders (often called shareholder capitalism) without regard for the environment, the planet and/or any negative externalities (pollution, waste, CO2, depletion of resources, etc.). Whereas linear business models generally deplete the planet’s resources, circular business models are regenerative, that is, they replenish the planet, using the model and terminology of Stahel (1984, 2010). Figure 1: Source Stahel (1984) A circular business model, by comparison, ensures the creation, delivery (or transfer) and capture of value without harming the planet and, even better, in a matter that can help to regenerate the planet. 16 Just like in the circular economy, as illustrated by the Ellen MacArthur Foundation’s infamous butterfly diagram, we consider the full range of technical or industrial flows as well as the biological (or bio- inspired) flows in defining the “circularity” of CBMs. A simplified version of the butterfly diagram by Velenturf et al. (2019)2 illustrates the two value circles that circular business models create to keep resources in use, and to avoid “disposal”, for as long as possible. Figure 2 Simplified Butterfly Diagram (Source: Velenturf et al (2019) 2 A. P. M. Velenturf, P. Purnell, L. E. Macaskie, W. M. Mayes and D. J. Sapsford, Chapter 1:A New Perspective on a Global Circular Economy , in Resource Recovery from Wastes: Towards a Circular Economy, 2019, pp. 1- 22 DOI: 10.1039/9781788016353-00001 eISBN: 978-1-78801-635-3 17 Once we realise that “80% of a product's environmental impact is defined at the design stage” (Source: EMF, 2021)3, we can see that circularity and CBMs are a design challenge. Using this prism, any waste created by a business model can thus be a design and/or business modelling flaw. CBMs strive to design out waste (not be bad for the planet), on the one hand, and, in certain cases, can take one important step further, and be regenerative (good for the planet). Thus, in simple terms, we can generally distinguish two types of CBM: existing business models redesigned or adapted to increase sustainability, and business models implemented as circular “by design”. Circular-by-design refers to CBMs designed from start to end to be circular within the prevailing economic ecosystem, with a minimum of waste throughout the value chain and for the lifetime of the product or service. Circular business models have only been emerging as a more mainstream theme in academic circles and journals since 4 approximately 2015 , with only about 30% of publications dedicated to the practice of companies and organisations in relation to CBMs. So, while interest is growing, we are still very much in new territory regarding practice, awareness and theory. In terms of principles, circular business models should address the same key principles of the circular economy, namely those commonly called reduce, reuse, recycle, secondary (not virgin) raw materials, eco-design, high efficiency, biomimetics, usership instead of ownership, sufficiency, substitution of manpower or alternative energy for fossil-based energy, cradle-to-cradle.5 While no business 3 e-academy webinar, Reniera O’Donnell of the Ellen MacArthur Foundation webinar, 11 May 2021 4 Rosa Sassanelli Terzi 2019 5 Ghisellini et al. (2016), Geissdoerfer et al. (2017), Schneider (2017) 18 model is expected to check all the boxes, many CBMs (and many well- known companies like Timberland and Patagonia) do integrate many of these principles effectively and extensively. The whom and what of circular business models Circular business models can be implemented just as easily by small companies as large companies. While part of the sustainability problem, consumer electronics multinationals like Samsung and Apple are also part of the emerging set of solutions. Today Apple has created a longstanding relationship with their customers who regularly buy, repair, and trade in their devices at Apple stores. Apple products have a valuable secondary market (product life extension) and customers now have the choice of reselling their gadgets or trading them in for discounted new products. In parallel, Apple has developed a robot, Daisy, to rapidly disassemble iPhones and recover rare metals and valuable materials which are then reused in new products (thus slowing the loop). Knowing that most iPhones will be disassembled, one could hope that Apple would include design for disassembly principles (aka modular by design) in future generations of its products to further narrow the loops of its value chain and move from recycling to the more resource and energy-efficient model of reassembly. Circular business models can be developed for products (carpets) and services (copier leasing), tangible (tyres) and intangible (high fashion) solutions, for high value (cars) and low value (used plastics) materials, for commodity raw materials (alloys) and high value products (electronics), and for B2C (consumer-oriented) as well as B2B (business-oriented) approaches. This very wide range of applicability makes it easier to imagine a world in which CBMs are the rule rather than the exception, easing the way for the transition to a circular 19 economy in the years ahead. That said, while governments and institutions, like the European Commission, play a critical role in promoting the transition to a circular economy via legislation, incentives and regulatory frameworks, no public CBMs have been clearly identified yet. This could be an interesting area of public sector innovation to promote in the years ahead. Classifying circular business models Regarding typology and classification of circular business models, as this is still an emerging field of enquiry, there is as yet little consensus, and new CBMs and new classifications appear regularly. An initial framework used for classifying CBMs was ReSOLVE developed by the Ellen MacArthur Foundation, referring to CBMs that Regenerate, Share, Optimise, Loop, Virtualise and Exchange. Even if most CBMs can be placed in the framework, many researchers and practitioners are still working to develop more practical approaches to classifying CBMs. Other recent attempts at classifying CBMs have used different prisms: sustainability impacts, product design principles, value propositions and flows, lifecycle stages, and more. To ensure simplicity, clarity, and stability of a classification approach over time, we have adopted an approach that predates ReSOLVE, a framework developed by Walter Stahel (1984 and ensuing) and adopted by a growing number of researchers in recent years. Stahel’s framework uses the prism of resource flows and categorises CBMs relative to resource loops, thus classifying CBMs as those helping to Slow (use again), Narrow (use less) or Close (use again) resource loops. While new CBMs and new classification systems will emerge over time, this prism allows us to understand and classify CBMs effectively and in relation to their 20 contribution to the circular economy ecosystem in which each CBM operates. Figure 3 A circular economy: narrow, slow, close and regenerate material and energy flows. (Source: Konietzko, Bocken & Hultink (2020)) In terms of classification, CBMs are often characterised according to three strategies they integrate: Retain Product Ownership (RPO), Product Life Extension (PLE) and Design-for-Recycling (DFR)6. CBMs in which ownership is retained by the producer or owner and separated from usership, including those that integrate Product as a Service (PaaS), also referred to as leasing solutions, Pay-per-Use, and/or Sharing via platforms like Airbnb, are prime examples of RPO Atasu, Dumas, and Van Wassenhove (2021). The Circular Business Model, 6 6 HBR Magazine (July–August 2021). 21 in action. Circular business models that integrate different circular elements like reuse, remanufacturing, upcycling, and industrial symbiosis, for example, demonstrate how PLE promotes and enables circularity. Finally, CBMs that integrate modularity, simplified user maintenance, design for disassembly, and other “design for” (referred to as “Design for X”) elements, are examples of DFR applications. RPO, PLE and DFR can work alone, together or in different configurations to attain varying degrees of business model circularity across the value chain. A key driver in the transition to the circular economy in the consumer (B2C) sphere is the broader classification of a wide range of CBMs relative to the servitisation of products or the transition to product- service systems (PSSs). While not circular a priori, these business models transform pay-to-own consumers into pay-to-use users – a key aspect of many CBMs. As companies retain ownership of the products (RPO) that they provide to users, they are highly incentivised to maintain products working in pristine condition (PLE) as close to their original quality, or even increase their value over time thanks to upgrades (of software or even hardware), and recover the products towards the end of their useful lives. This is a key design element, one could even say mindset, of CBMs, rethinking the relationship with consumer-users so that incentives align according to circular economy principles – less consumption, better collaboration between users and providers, less extraction or waste of resources, and closed loops. It is good for people, good for business, and good for the planet. 22 Macroeconomic and eco-systemic perspectives on circular business models Looking at the bigger macroeconomic picture, in terms of importance, CBMs contribute to the slowing of resource loops by encouraging extended product and asset life as well as different forms of reuse of products. They also help to ensure closing resource loops by transforming by-products or “waste” into reusable materials through different forms of business model innovation (such as, industrial symbiosis where one company’s waste is another’s raw material). And, finally, CBMs help to narrow resource loops through circular product design and manufacturing efficiencies. 7 In simpler terms, CBMs help companies extend the life span of products, use fewer resources and materials, maintain product value throughout its lifecycle(s), and redesign both industrial processes and 8 customer/user relationships. Keep in mind that while each company’s business model can be circular-by-design, “circularity” will only emerge collectively within an ecosystem of linked companies and organisations.9 Looking from a systemic viewpoint, a circular economy requires an ecosystemic approach. It is difficult to imagine the unique circumstances in which one company could attain circularity alone. As it appears nearly impossible to adopt a circular economy wholescale, the key to this transition seems to be a collaboration among multiple individual organisations and industries adopting circular business models. Thus, CBM innovation and experimentation at the micro/company level will be key to driving the transition at the macroeconomic level. As success 7 Bocken et al (2016) 8 Based on Urbinati et al (2017) 9 Based on Konietzko, Bocken & Hultink (2020) 23 builds on success, those companies, like Caterpillar, Patagonia, Rent the Runway, Ricoh, Timberland, amongst others, that can deliver superior results while implementing CBMs, will inspire others to follow their lead and accelerate the transition. In Europe, regulation and frameworks like the EU’s Shared Green Deal, the Circular Economy Action Plan 2020, the EU Ecodesign Directive, and the Sustainable Product Policy Initiative, will all play a key role in setting the right framework for circular business model experimentation and implementation. Organisations like SITRA (Finland) are lobbying to ensure that only safe, circular, and sustainable products be allowed in the EU by 2030. This would further accelerate the transition to circular business models. In other regions, we are also seeing discussions advancing on the circular economy, notably in China, Japan and Singapore with different degrees of CBM experimentation already in progress. As different regions, with different local configurations, experiment with CBMs we can expect to see learning disseminated quickly and best practices transferred from one region to another. It is easier to create circular economies, and thus CBMs, at the country level or, better yet, in island economies like Japan and Singapore. However, not all practices are as easily transferable to more diverse and “permeable” markets. Another key benefit of CBMs is that their implementation at the organisational level simultaneously generates value for the company, for the economy and for society. Thus, they also contribute to social impact. Circular business models can be quite impactful on a number of the United Nations’ Strategic Development Goals (SDGs), notably Goal 7 (Affordable and Clean Energy), Goal 8 (Decent Work and Economic Growth), Goal 9 (Industry, Innovation and Infrastructure), Goal 11 (Sustainable Cities and Communities), and Goal 12 (Responsible Consumption and Production). For forward-thinking 24 leaders and companies looking to embed purpose and value further into their operations, this too should encourage the accelerated emergence of circular and impactful business models. Circular business models to boost performance CBMs are a source of significant competitive advantage for companies as they can and should generate additional economic benefits (lower costs and higher revenues), create new value- accreting partnerships with suppliers and stakeholders, as well as new ways of connecting with their users as the relationship is redefined into a more collaborative exchange of value. (Based on Best Practice Examples of Circular Business Models, Ministry of Environment and Food of Denmark, 2016). The transition to a circular economy will require from each company the development of four distinct innovative approaches to be both successful and circular: product and service innovation, business model innovation, value chain/cycle innovation (circular sourcing and various forms of collaboration), and ecosystem innovation (integrating as a small part in a circular whole). And to do that, a key success factor is and will be experimentation. True to the precepts of lean innovation, success will come from prototyping, testing, and adapting on a small scale before scaling up to full operations. CBM innovation will flourish only after a period of widespread experimentation that will help us all learn, collectively what works where and under what conditions and, equally, what does not. Legislators, regions, and governments can help incentivise the players of the circular economy to experiment by reducing the financial sting of failure, which we know will certainly occur, and/or to reduce the cost of running experiments. Organisations like Climate-KIC in the EU are doing this for climate-improvement 25 initiatives. It would be only natural to see the emergence of similar initiatives for CBMs. There is also a strategic aspect to CBMs as they allow companies to “extend their businesses towards other stages of the value cycle”10, while new actors can play different roles all along the value cycle. Overall, this leads to new competitive dynamics in which collaboration and cooperation will play a key part and allow players to position themselves dynamically along the value cycle, and more carefully choose the value they aim to create, deliver and capture, and what they leave to others. As companies adopt an experimentation, value cycle and collaborative mindset, we can expect waste to be increasingly designed out, to see continued performance improvements, and better implementation of circular innovations. As companies learn to close the loops of resource flows, supply chains become more efficient, waste is eliminated, closer user and stakeholder relationships are created, new forms of value are created, and business processes are redesigned and realigned – all the hallmarks of operational excellence – we can logically expect to see optimised performance in these companies. And recent research 11 demonstrates the link between dynamic capabilities of a firm, implementation of circular economy elements and superior 12 performance. Other authors note that companies that are more 10 Kortmann/Piller 2016 as cited in Circular Business Models: Overcoming Barriers, Unleashing Potentials, acatech (2020) 11 Khan, O, Daddi, T, Iraldo, F. The role of dynamic capabilities in circular economy implementation and performance of companies. Corp Soc Responsib Environ Manag. 2020; 27: 3018– 3033. https://doi.org/10.1002/csr.2020 12 Simone Sehnem, Charbel Jose Chiappetta Jabbour, Susana Carla Farias Pereira, Ana Beatriz Lopes de Sousa Jabbour, 26 proactive towards the circular economy, that is, the implementation of circular business models, also display better management of sustainable supply chains and critical business success factors. When done correctly, we can see that CBMs are not just “greener” business models, but they are superior business models. Once that is understood, companies will probably adopt circular principles en masse. Technology and biology in the service of circular business models While CBMs are enablers for the circular economy, new technologies are enablers for the emergence of new and “smarter” CBMs. Technologies such as the Internet of Things (IoT), Industry 4.0 and computer-aided design (CAD) are combining to create novel approaches, like digital twins in which physical objects are represented digitally/virtually, which are being developed into new CBMs that allow for the reduction of physical assets on the one hand, and the extension of the useful lives of existing products and assets, on the other. For example, we already see experimentation with organisations using digital twin technologies to allow users to do their own product upgrades and repairs (Smart Repairs) helped by augmented and virtual reality, which is also referred to as mixed reality. These technologies and the ongoing transition to alternative energies, should also facilitate the development of circular supply and value chains or “value cycles”. With the current accelerated emergence and convergence of new technologies and new energies, Improving sustainable supply chains performance through operational excellence: circular economy approach, Resources, Conservation and Recycling, Volume 149, 2019, Pages 236-248, ISSN 0921-3449, https://doi.org/10.1016/j.resconrec.2019.05.021. 27 we expect to see a Cambrian-era of rapid innovation in circular business models in the years to come. We mentioned earlier that the circular economy has both technical and biological flows (see Butterfly Diagram above). In terms of biological flows, CBMs often incorporate various forms of biomimicry, or nature-inspired design, to be more effective in designing out waste and even to be regenerative. Among circular economy pundits it is often said that “the concept of waste does not exist in nature,” and companies and researchers are increasingly looking to nature for bio- inspired design. CBMs such as industrial symbiosis (using one company’s waste as another company’s inputs) or upcycling (adding value to what was considered waste) are prime examples of biomimetic principles in action. Academic and corporate research labs have been active in recent years developing synthetic biomaterials to reduce the extraction and use of natural resources. The growing field of bio-inspired CBMs and start-ups is undergoing rapid innovation in areas such as bio-“meats” and “leathers”, and will be another exciting industry to watch in the years ahead. Barriers and questions relative to circular business models While many companies are designing circular business models “by- design” from the start, and others are integrating principles of the circular economy into their existing business models, recent research has brought to light numerous barriers to developing circular business models. Chief among the challenges cited in various studies are financial limitations, notably the inability to model the financial advantages of the circular approach when compared to a more linear model ex ante. There are also structural barriers (organisational silos), operational constraints (lack of necessary infrastructure, capacity, and talent), attitudinal barriers (managerial risk aversion and lack of 28 understanding), and technological barriers (lack of access, of knowledge, of expertise).13 A useful framework and diagram to think about barriers and the nested interactions among the players in a circular economy was developed by Acatech 14. The framework presents, in the diagram (below), the dynamic interactions between the prevailing barriers (in blue) to CBM adoption overlayed on the processes integral to the circular economy (in green). Figure 4 source - Circular Business Models: Overcoming Barriers, Unleashing Potentials, acatech (2020) 13 Ritzen and Sandstrom (2017) 14 Circular Business Models: Overcoming Barriers, Unleashing Potentials, acatech/CEI Deutschland (2020) 29 As the body of knowledge relative to CBMs continues to grow, we still have important questions that remain unanswered. Nussholz (2017) asks “what improvements in environmental impact should be realised for a company to have a viable claim that it runs a circular business model?” or “how much should a company contribute to cycling resources and closing resource flows to have a viable claim that it runs a circular business model?” Remember that even CBMs that improve resource efficiency at the company level do not necessarily do the same at an environmental level (see, for example, rebound effects). And companies that may offer circular services, such as some sharing platforms, and/or services that serve the circular economy like reverse logistics, may not operate a CBM per se. As circular economy research progresses, we can expect to get answers to some of these fundamental questions, while new questions continue to emerge as we make progress on circularity and circular design. Chapter contents While the theoretical underpinnings continue to expand, and the nomenclature of the various circular business models continues to proliferate, in this chapter we will limit ourselves to presenting the key CBMs for which there is a growing consensus and body of knowledge. Based on the Stahel resource flow classification, and a slightly modified version of the generally accepted linear-to-circular overlay model (see graphic below), we will present the circular business models relative to reuse, repair, refurbishing and remanufacturing, product as a service (servitisation or product- service systems), sharing (and sharing platforms) as well as recycling, organised according to whether they are considered to be primarily 30 slowing, narrowing or closing resource loops. This latter classification is open to interpretation and a bit of discussion among researchers. Source: CERC @ EPBS In addition, we will provide recent examples of these CBMs being implemented by companies of different scales, geographies and sizes which will help further the understanding of the principles laid out here and, hopefully, inspire others to implement similar models in their organisations in the near future. 31